Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy

Nicoletta Batini, Alejandro Justiniano, Paul Levine () and Joseph Pearlman

No 804, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper provides a first attempt to quantify and at the same time utilize estimated measures of uncertainty for the design of robust interest rate rules. We estimate several variants of a linearized form of a New Keynesian model using quarterly US data. Both our theoretical and numerical results indicate that Inflation-Forecast-Based (IFB) rules are increasingly prone to the problem of indeterminacy as the forward horizon increases. As a consequence the stabilization performance of optimized rules of this type worsens too. Robust IFB rules can be designed to avoid indeterminacy in an uncertain environment, but at an increasing utility loss as rules become more forward-looking.

Keywords: robustness; Taylor rules; inflation-forecast-based rules; indeterminacy (search for similar items in EconPapers)
JEL-codes: E37 E52 E58 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2004-09
New Economics Papers: this item is included in nep-for, nep-mac, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: Robust inflation-forecast-based rules to shield against indeterminacy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0804

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