Optimal Constrained Interest-rate Rules

George Evans and Bruce McGough ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We show that if policy-makers compute the optimal unconstrained interest-rate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.

Keywords: Monetary policy; Taylor rules; indeterminacy; learning; Estability; parameter uncertainty; robust rules (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E52 (search for similar items in EconPapers)
Pages: 35
Date: 2005-05-19, Revised 2006-05-31
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Optimal Constrained Interest-Rate Rules (2007)
Journal Article: Optimal Constrained Interest‐Rate Rules (2007)
Working Paper: Optimal Constrained Interest Rate Rules (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2005-9

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