Evaluating Interest Rate Rules in an Estimated DSGE Model

Andrea Tambalotti, Andrea Ferrero and Vasco Cúrdia

No 402, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: The empirical DSGE literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound but their relative merit is rarely discussed. We provide some of this discussion by comparing the fit of a large set of interest rate rules (44 in total), which we estimate as part of a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level — which would prevail in the absence of distortions — have the worst fit within the set we consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.

Date: 2010
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Working Paper: Evaluating interest rate rules in an estimated DSGE model (2011)
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