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Complexity and Monetary Policy

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  • Athanasios Orphanides

    (Massachusetts Institute of Technology)

  • Volker Wieland

    (University of Frankfurt)

Abstract

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as a laboratory, this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output-gap mismeasurement and make use of a new model database to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across eleven models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 9 (2013)
Issue (Month): 1 (January)
Pages: 167-204

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Handle: RePEc:ijc:ijcjou:y:2013:q:0:a:8

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  4. Beck, Günter W. & Wieland, Volker, 2008. "Central bank misperceptions and the role of money in interest rate rules," CFS Working Paper Series 2008/25, Center for Financial Studies (CFS).
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Citations

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Cited by:
  1. Afanasyeva, Elena, 2012. "Atypical Behavior of Money and Credit: Evidence From Conditional Forecasts," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65405, Verein für Socialpolitik / German Economic Association.
  2. Issing, Otmar, 2013. "A new paradigm for monetary policy?," CFS Working Paper Series 2013/02, Center for Financial Studies (CFS).
  3. Roland Döhrn & György Barabas & Heinz Gebhardt & Tobias Kitlinksi & Martin Micheli & Simeon Vosen & Lina Zwick, 2013. "Die wirtschaftliche Entwicklung im Inland: Binnennachfrage trägt Aufschwung," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 64, 09.
  4. Otmar Issing, 2013. "A New Paradigm for Monetary Policy?," International Finance, Wiley Blackwell, vol. 16(2), pages 273-288, 06.
  5. Nadia Tahir, 2013. "Forward-Looking and Backward-Looking Taylor Rules: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 121-145, July-Dec.

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