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The performance of forecast-based monetary policy rules under model uncertainty

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  • Williams, John C.
  • Levin, Andrew T.
  • Wieland, Volker

Abstract

We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty: such rules respond to the one-year ahead inflation forecast and to the current output gap, and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. In light of these results, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences JEL Classification: E31, E52, E58, E61

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Paper provided by European Central Bank in its series Working Paper Series with number 0068.

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Date of creation: Jul 2001
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Handle: RePEc:ecb:ecbwps:20010068

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