Optimal interest rate rules and inflation stabilization versus price-level stabilization
AbstractThis paper compares the properties of interest rate rules such as simple Taylor rules and rules that respond to price-level fluctuations—called Wicksellian rules—in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare and robustness to alternative shock processes, and they are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule—that is, a monetary policy rule that implements the optimal plan and is also completely robust to the specification of exogenous shock processes.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 546.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-CBA-2012-03-21 (Central Banking)
- NEP-MAC-2012-03-21 (Macroeconomics)
- NEP-MON-2012-03-21 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roberto Billi, 2008. "Price-level targeting and risk management in a low-inflation economy," Research Working Paper RWP 08-09, Federal Reserve Bank of Kansas City.
- Preston, Bruce, 2008. "Adaptive learning and the use of forecasts in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3661-3681, November.
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