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A close look at model-dependent monetary policy design

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Author Info

  • Miguel Casares

Abstract

This article first explores the implications of model specification on the design of targeting rules in a world of model certainty. As a general prescription, a targeting rule must counterbalance the private-sector dynamics: The more backward-looking behavior is observed in either the output gap or inflation, the more forward-looking monetary policy should be. Likewise, a more forward-looking economy would require stronger backward-looking reactions of the nominal interest rate to the output gap or inflation. The article also analyzes the effects of implementing monetary policy in an environment with uncertainty. Our results indicate that a simple model-invariant rule of the style proposed by Taylor (1993) performs better than a model-dependent targeting rule in the presence of moderate parameter uncertainty.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2006)
Issue (Month): Sep ()
Pages: 451-470

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Handle: RePEc:fip:fedlrv:y:2006:i:sep:p:451-470:n:v.88no.5

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Keywords: Monetary policy;

References

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Cited by:
  1. Juan Paez-Farrell, 2012. "Resuscitating the ad hoc loss function for monetary policy analysis," Discussion Paper Series 2012_06, Department of Economics, Loughborough University, revised Jun 2012.

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