 Alternative Monetary Policy Rules for the PhilippinesFrancisco Dakila, Jr.
Philippine Review of Economics, 2001, vol. 38, issue 2, 1-36 Abstract: A theoretical basis for modifying the currently popular nominal feedback rules is provided for the conduct of monetary policy so that they react to the forecasted inflation rate, instead of to current or past actual inflation. It is shown that such a modification reduces the risk of economic instability arising from the adoption of a nominal feedback rule, and thus produces results that are closer to the optimal solution. It is furthermore shown that given rational expectations, a forward-looking rule, and a money demand function that is not completely interest-inelastic, the optimal monetary policy entails some degree of policy activism. Friedman s constant money growth rule is therefore shown to be optimal only in a special case, i.e, when the money demand function is completely insensitive to the rate of interest. Empirical simulations are conducted, which support the view that forward-looking nominal instrument rules provide better performance in terms of keeping inflation closer to the targeted level. The simulations also provide a measure of the optimal degree of activism for monetary policy, as well as of the optimal forecasting horizon. Keywords: monetary policy; inflation targeting (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:phs:prejrn:v:38:y:2001:i:2:p:1-36 Access Statistics for this article More articles in Philippine Review of Economics from University of the Philippines School of Economics and Philippine Economic Society Contact information at EDIRC. |
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