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Simple Monetary Policymaking without the Output Gap

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  • Leitemo, Kai
  • Lonning, Ingunn

Abstract

Several research contributions have argued that information about the output gap is essential for a good monetary policy rule. However, as pointed out by Orphanides (2001), there is considerable real-time uncertainty about the size of the output gap. The paper argues that simple monetary policy rules that rely exclusively on (survey-based) information about future and past inflation rates may be more efficient than optimized Taylor rules once real-time output gap uncertainty is accounted for. Even when only information about historical inflation rates is available, a very simple policy rule may be constructed that improves on the Taylor rule.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0085
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 6 (September)
Pages: 1619-1640

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:6:p:1619-1640

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Bjørnland, Hilde C. & Brubakk, Leif & Jore, Anne Sofie, 2006. "Forecasting inflation with an uncertain output gap," Memorandum 11/2006, Oslo University, Department of Economics.
  2. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  3. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  4. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Working Paper Series 0764, European Central Bank.
  5. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
  6. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers 2012/08, Bogazici University, Department of Economics.
  7. Scharnagl, Michael & Gerberding, Christina & Seitz, Franz, 2007. "Simple interest rate rules with a role for money," Discussion Paper Series 1: Economic Studies 2007,31, Deutsche Bundesbank, Research Centre.
  8. Nikolay Markov & Carlos de Porres, 2011. "Is the Taylor Rule Nonlinear? Empirical Evidence from a Semi-Parametric Modeling Approach," Research Papers by the Department of Economics, University of Geneva 11052, Département des Sciences Économiques, Université de Genève.
  9. Sra Chuenchoksan & Don Nakornthab & Surach Tanboon, 2008. "Uncertainty in the Estimation of Potential Output and Implications for the Conduct of Monetary Policy," Working Papers 2008-04, Economic Research Department, Bank of Thailand.

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