Monetary policy interest rate rule in a CGE model

This paper develops a CGE model with an explicit monetary policy rule which replaces typical exogenous numeraire so that the model can have endogenous absolute price. A model with exogenous numeraire can be derived as a special case of the current model through a flexible parameterization. It shows that in the presence of nominal rigidities, simulation results for the same shock can be different depending on the choice of exogenous numeraire. Moreover, the current model also gives different results for the same shock by creating inflation. The paper highlights the importance of choosing numeraire or considering the interest rate rule instead of fixed numeraire in the presence of nominal rigidities.