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Nominal income versus Taylor-type rules in practice

Jonathan Benchimol () and Andre Fourcans ()

No WP1610, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Fed’s loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central bank’s objectives are not consistently met by a single rule for all periods.

Keywords: Monetary policy; NGDP targeting; Taylor rule; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2016-07-04
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