Testing monetary policy optimality using volatility outcomes: a novel approach

Federico Ravenna

The B.E. Journal of Macroeconomics, 2016, vol. 16, issue 2, 597-621

Abstract: We propose a method to assess the efficiency of macroeconomic outcomes using the restrictions implied by optimal policy DSGE models for the volatility of observable variables. The method exploits the variation in the model parameters, rather than random deviations from the optimal policy. In the new Keynesian business cycle model this approach shows that optimal monetary policy imposes tighter restrictions on the behavior of the economy than is readily apparent. The method suggests that for the historical output, inflation and interest rate volatility in the United States over the 1984–2005 period to be generated by any optimal monetary policy with a high probability, the observed interest rate time series should have a 25% larger variance than in the data.

Keywords: business cycle; DSGE model; optimal monetary policy; policy performance (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejm-2015-0008 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:16:y:2016:i:2:p:597-621:n:5

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejm/html

DOI: 10.1515/bejm-2015-0008

Access Statistics for this article

The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().