Business Cycles and Monetary Policy Analysis in a Structural Sticky Price Model of the Lebanese Economy

A medium-size structural model is built in this article in order to de fi ne and reshape the Lebanese economy characteristics and features. However, the structural model is featured by a Taylor monetary policy rule design with nominal interest smoothing. Including the Taylor rule helped us to analyze the response function of each variables to different monetary policy shocks (Frish, 1933). Hence, the results of this paper showed how changing coef fi cients may in fl uence the standard deviations of variables in the model as such the in fl ation rate, the nominal interest rate and the output GAP (Orphanides and Simon van Norden, 1999). More precisely, the performance of the model is detected while moving the coef fi cients assuming that monetary authorities ’ intention is to reduce volatility in the three mentioned variables. Consequently, our fi ndings proved that the coef fi cient of responsiveness to in fl ation deviations, the output GAP coef-fi cient and the nominal interest rate coef fi cient are little bit larger than the ones reported in empirical works for the Euro area 1 . Therefore, these results re fl ect in some way that the Lebanese Central bank conduct its monetary policy with some responsiveness, in addition, fi ndings ensure that actual behavior of the Lebanese central bank regarding the nominal interest rate setting is well captured by a Taylor rule including the initial proposed coef fi cients.