AN ENCOMPASSING FRAMEWORK FOR EVALUATING SIMPLE MONETARY POLICY RULES

Karen Dury, Ray Barell and Ian Hurst
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Karen Dury: National Institute of Economic and Social Research
Ray Barell: National Institute of Economic and Social Research
Ian Hurst: National Institute of Economic and Social Research

No 184, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: In this paper we build an encompassing framework to analyse the stability conditions associated with various policy rules. Taylor and others have argued that model stability requires interest rate policy rules to have an inflation feedback parameter greater than one. In a world where there are nominal rigidities in the short-term evolution of demand this may not be the case. We show that with a combined nominal GDP and inflation targeting rule, this stability condition is overly restrictive. We use stochastic simulations to evaluate various monetary policy rules, and parameterisations, that are nested within a general framework. We do this using the National Institutes Global Econometric Model, NiGEM, which combines a neo-classical structure and rational expectations with institutional detail. Our results show that while one rule may be the most effective at stabilising the EMU aggregates, another may be more effective for individual economies, implying a change in the covariance structure of output and inflation within EMU. We discuss the resulting covariance structure and their implications for decision making within the ECB.

Date: 2000-07-05
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf0:184

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