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Monetary Policy Design under Competing Models of Inflation Persistence

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  • Solange Gouvea
  • Abhijit Sen Gupta

Abstract

Most of the recent research in monetary policy has focused on the use of a single exogenously specified standard ad hoc loss function to evaluate policy performance. This literature has come to the conclusion that backward looking models are more difficult to control i.e. monetary policy performance deteriorates with an increase in inflation persistence. In this paper we test the validity of this conclusion using both a standard ad hoc loss function and a model consistent loss function across competing models of inflation persistence. We find that conclusions vary markedly with different types of loss functions. We also look into the case where the policymaker is uncertain about the pricing behavior of firms and investigate the presence of robust policy rules. We find that the existence of robust rules depend crucially on the type of loss function used to evaluate outcomes.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps137.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 137.

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Date of creation: May 2007
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Handle: RePEc:bcb:wpaper:137

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Web page: http://www.bcb.gov.br/?english

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  1. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2004. "The performance and robustness of simple monetary policy rules in models of the Canadian economy," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 978-998, November.
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