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Simple Monetary Policy Rules Under Model Uncertainty

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International Finance and Financial Crises

Abstract

Using stochastic simulations and stability analysis, the paper compares how different monetary policy rules perform in a moderately nonlinear model with a time-varying 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 policy rules within linear models, in which the consequences of responding myopically to significant overheating are extremely unrealistic.

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Authors and Affiliations

  1. International Monetary Fund, Washington, DC, 20431, USA

    Peter Isard & Douglas Laxton

  2. Stockholm School of Economics, Stockholm, Sweden

    Ann-Charlotte Eliasson

Authors
  1. Peter Isard
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  2. Douglas Laxton
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  3. Ann-Charlotte Eliasson
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Peter Isard Assaf Razin Andrew K. Rose

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© 1999 Springer Science+Business Media New York

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Isard, P., Laxton, D., Eliasson, AC. (1999). Simple Monetary Policy Rules Under Model Uncertainty. In: Isard, P., Razin, A., Rose, A.K. (eds) International Finance and Financial Crises. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-4004-1_9

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  • DOI: https://doi.org/10.1007/978-94-011-4004-1_9

  • Publisher Name: Springer, Dordrecht

  • Print ISBN: 978-94-010-5770-7

  • Online ISBN: 978-94-011-4004-1

  • eBook Packages: Springer Book Archive

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