Simple Monetary Policy Rules Under Model Uncertainty

Ann-Charlotte Eliasson, Peter Isard and Douglas Laxton

No 1999/075, IMF Working Papers from International Monetary Fund

Abstract: Using stochastic simulations and stability analysis, the paper compares how different monetary rules perform in a moderately nonlinear model with a time-varying nonaccelerating-inflation-rate-of-unemployment (NAIRU). Rules that perform well in linear models but implicitly embody backward-looking measures of real interest rates (such as conventional Taylor rules) or substantial interest rate smoothing perform very poorly in models with moderate nonlinearities, particularly when policymakers tend to make serially correlated errors in estimating the NAIRU. This challenges the practice of evaluating rules within linear models, in which the consequences of responding myopically to significant overheating are extremely unrealistic.

Keywords: WP; Phillips curve; interest rate; monetary policy; monetary policy rules; NAIRU uncertainty; macroeconomic models; inflation expectation; policy rule; Phillips curve paradigm; Taylor rule; reaction function; unemployment gap; Inflation; Unemployment rate; Real interest rates; Unemployment; Inflation targeting; Global (search for similar items in EconPapers)
Pages: 60
Date: 1999-05-01
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Citations: View citations in EconPapers (163)

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Journal Article: Simple Monetary Policy Rules Under Model Uncertainty (1999)
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