News Shocks and Optimal Simple Rules

Roland Winkler () and Hans-Werner Wohltmann

Review of Economics, 2011, vol. 62, issue 1, 1-11

Abstract: This paper evaluates the performance of optimal simple policy rules in the presence of news shocks. It is shown that the inclusion of forward-looking elements enhances the performance of simple optimized interest rate rules when agents learn about future disturbances in advance. We provide a rationale for this result by demonstrating that, if shocks are news shocks, the optimal unrestricted control rule under commitment contains as a basic principle a forward-looking element.

Date: 2011
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DOI: 10.1515/roe-2011-0102

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