Interest Rate Rules and the Response to the Output Gap

Abstract: Modern monetary policy analysis is built around the concept of an interest rate rule that responds to both inflation and output. This paper evaluates the quantitative implications of having a policy rule target different definitions of the output gap in a New Keynesian model with endogenous capital. One crucial result is that different model specifications result in alternative values for potential output, raising the issue of which output gap to target. The results of this paper suggest that targeting the true output gap can be well approximated by a rule that only reacts to inflation.

Keywords: Monetary Policy Rules; Output Gap (search for similar items in EconPapers)
JEL-codes: E31 E32 E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2005-03-21
Note: Type of Document - pdf; pages: 19
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