Simple rules versus optimal policy: what fits?

Ida Wolden Bache, Leif Brubakk and Junior Maih
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Ida Wolden Bache: Norges Bank (Central Bank of Norway)

No 2010/03, Working Paper from Norges Bank

Abstract: We estimate a small open-economy DSGE model for Norway with two specifications of monetary policy: a simple instrument rule and optimal policy based on an intertemporal loss function. The empirical fit of the model with optimal policy is as good as the model with a simple rule. This result is robust to allowing for misspecification following the DSGE-VAR approach proposed by Del Negro and Schorfheide (2004). The interest rate forecasts from the DSGE-VARs are close to Norges Bank's official forecasts since 2005. One interpretation is that the DSGE-VAR approximates the judgment imposed by the policymakers in the forecasting process.

Keywords: DSGE models; forecasting; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: C53 E52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-04-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-for, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2010_03

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