Simple Monetary Policy Rules Under Model Uncertainty

Author/Editor:

Ann-Charlotte Eliasson ; Peter Isard ; Douglas Laxton

Publication Date:

May 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Using stochastic simulations and stability analysis, the paper compares how different monetary rules perform in a moderately nonlinear model with a time-varying nonaccelerating-inflation-rate-of-unemployment (NAIRU). Rules that perform well in linear models but implicitly embody backward-looking measures of real interest rates (such as conventional Taylor rules) or substantial interest rate smoothing perform very poorly in models with moderate nonlinearities, particularly when policymakers tend to make serially correlated errors in estimating the NAIRU. This challenges the practice of evaluating rules within linear models, in which the consequences of responding myopically to significant overheating are extremely unrealistic.

Series:

Working Paper No. 1999/075

Subject:

English

Publication Date:

May 1, 1999

ISBN/ISSN:

9781451849714/1018-5941

Stock No:

WPIEA0751999

Pages:

60

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