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Estimates of the Effectiveness of Monetary Policy

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Abstract

This paper examines various interest rate rules, as well as policies derived by solving optimal control problems, for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. A multicountry econometric model is used for the experiments. The results differ sharply from those obtained using recent models in which the coefficient on inflation in the nominal interest rate rule must be greater than one in order for the economy to be stable.

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File URL: http://cowles.econ.yale.edu/P/cd/d12b/d1298.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1298.

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Length: 29 pages
Date of creation: Apr 2001
Date of revision: Jun 2003
Publication status: Published in Journal of Money, Credit and Banking (August 2005), 645-660
Handle: RePEc:cwl:cwldpp:1298

Note: CFP 1155
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Keywords: Monetary policy; interest rate rules;

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References

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  1. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  3. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
  4. James W. Christian, 1968. "A Further Analysis Of The Objectives Of American Monetary Policy," Journal of Finance, American Finance Association, vol. 23(3), pages 465-477, 06.
  5. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  6. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October.
  7. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  8. Bennett T. McCallum & Edward Nelson, 1999. "Performance of Operational Policy Rules in an Estimated Semiclassical Structural Model," NBER Chapters, in: Monetary Policy Rules, pages 15-56 National Bureau of Economic Research, Inc.
  9. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  10. David Reifschneider & Robert Tetlow & John Williams, 1999. "Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-19.
  11. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  12. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
  13. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  14. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  15. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
  16. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
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Citations

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Cited by:
  1. Gaffeo, Edoardo & Canzian, Giulia, 2011. "The psychology of inflation, monetary policy and macroeconomic instability," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 660-670.
  2. Lewis, Kenneth A. & Seidman, Laurence S., 2008. "Overcoming the zero interest-rate bound: A quantitative prescription," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 751-760.
  3. repec:ebl:ecbull:v:5:y:2006:i:19:p:1-7 is not listed on IDEAS
  4. Mandler, Martin, 2009. "In search of robust monetary policy rules - Should the Fed look at money growth or stock market performance?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 345-361, June.
  5. Barbara Annicchiarico & Alessandro Piergallini, 2006. "Inflation Shocks and Interest Rate Rules," CEIS Research Paper 85, Tor Vergata University, CEIS.
  6. Bruno Merlevede & Joseph Plasmans & Bas van Aarle, 2003. "A Small Macroeconomic Model of the EU-Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 221-250, July.
  7. Alistair Dieppe & Jerome Henry & Peter Mc Adam, . "Labour market dynamics in the euro area: A model-based sensitivity analysis," Modeling, Computing, and Mastering Complexity 2003 09, Society for Computational Economics.
  8. Siagi Ayub Nteng’a & Ombui Kefa Andrew & Mukulu Elegwa, 2014. "Effect of the Structure of Guidance and Counselling Programme on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(1), pages 57-76, January.
  9. Jean-Pascal Benassy, 2005. "Interest Rate Rules, Price Determinacy and the Value of Money in a non Ricardian World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 651-667, July.
  10. Ray C. Fair, 2009. "Possible Macroeconomic Consequences of Large Future Federal Government Deficits," Cowles Foundation Discussion Papers 1727, Cowles Foundation for Research in Economics, Yale University, revised Feb 2010.
  11. Ray Fair, 2009. "Possible Macroeconomic Consequences of Large Future Federal Government Deficits," Yale School of Management Working Papers amz2492, Yale School of Management.
  12. Mandler, Martin, 2006. "Are there gains from including monetary aggregates and stock market indices in the monetary policy reaction function? A simulation study of recent U.S. monetary policy," MPRA Paper 2318, University Library of Munich, Germany.
  13. Luis Carranza & Jose E. Galdon-Sanchez & Javier Gomez-Biscarri, 2010. "Understanding the Relationship between Financial Development and Monetary Policy," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 849-864, November.
  14. Ray C. Fair, 2011. "What It Takes to Solve the U.S. Government Deficit Problem," Cowles Foundation Discussion Papers 1807, Cowles Foundation for Research in Economics, Yale University, revised May 2012.
  15. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.

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