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The Performance of Forecast-Based Monetary Policy Rules under Model Uncertainty

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Author Info
Andrew Levin
Volker Wieland
John C. Williams

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Abstract

We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty; such rules respond to the one-year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 3 (June)
Pages: 622-645
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Handle: RePEc:aea:aecrev:v:93:y:2003:i:3:p:622-645

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