Simple Monetary Policymaking without the Output Gap

Kai Leitemo and Ingunn Lonning

Journal of Money, Credit and Banking, 2006, vol. 38, issue 6, 1619-1640

Abstract: Several research contributions have argued that information about the output gap is essential for a good monetary policy rule. However, as pointed out by Orphanides (2001), there is considerable real-time uncertainty about the size of the output gap. The paper argues that simple monetary policy rules that rely exclusively on (survey-based) information about future and past inflation rates may be more efficient than optimized Taylor rules once real-time output gap uncertainty is accounted for. Even when only information about historical inflation rates is available, a very simple policy rule may be constructed that improves on the Taylor rule.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:38:y:2006:i:6:p:1619-1640

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