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Monetary Policy Analysis in Backward-Looking Models

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  • Lindé, Jesper

    ()
    (Research Department, Central Bank of Sweden)

Abstract

In this paper, I investigate quantitatively how sensitive a typical backward-looking model used in monetary plicy analysis is to the Lucas critique. To do this, I use an equilibrium business cycle model with a Taylor-type rule for nominal money growth. The backward-looking model displays considerable parameter instability, both from a statistical and economic point of view, when the parameters in the estimated monetary policy ruel change. THe findings suggest that the robustness of the conclusions in the literature on the relative merits of an alternative monetary policy rules should be checked in an equilibrium framework.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 114.

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Length: 30 pages
Date of creation: 01 Nov 2000
Date of revision:
Publication status: Forthcoming in Annales d'Economie et de Statistique.
Handle: RePEc:hhs:rbnkwp:0114

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Lucas critique; Real business cycle model; Taylor rules; Aggregate supply; Aggregate demand;

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  1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 553-578, June.
  2. Eric M. Leeper & Tao Zha, 2002. "Modest Policy Interventions," NBER Working Papers 9192, National Bureau of Economic Research, Inc.
  3. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers, Rochester, Business - General 88-05, Rochester, Business - General.
  4. Jesper Linde, 2001. "Testing for the Lucas Critique: A Quantitative Investigation," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 986-1005, September.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  6. Bennett T. McCallum, 1984. "Monetarist Rules in the Light of Recent Experience," NBER Working Papers 1277, National Bureau of Economic Research, Inc.
  7. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  8. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  11. Geweke, John, 1985. "Macroeconometric Modeling and the Theory of the Representative Agent," American Economic Review, American Economic Association, American Economic Association, vol. 75(2), pages 206-10, May.
  12. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-01, C.V. Starr Center for Applied Economics, New York University.
  13. Jeff Fuhrer & Arturo Estrella, 1999. "Are 'Deep' Parameters Stable? The Lucas Critique as an Empirical Hypothesis," Computing in Economics and Finance 1999, Society for Computational Economics 621, Society for Computational Economics.
  14. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, Elsevier, vol. 41(6), pages 1111-1146, June.
  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  16. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 506, Board of Governors of the Federal Reserve System (U.S.).
  17. ENGLE, Robert F. & HENDRY, David F. & RICHARD, Jean-François, . "Exogeneity," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -516, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Filippo Altissimo & Stefano Siviero & Daniele Terlizzese, 1999. "How deep are the deep parameters?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 354, Bank of Italy, Economic Research and International Relations Area.
  19. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 5(1), pages 7-29, January.
  20. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 173-203, January.
  21. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers, Lund University, Department of Economics 1998:3, Lund University, Department of Economics, revised 21 Apr 1999.
  22. Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers, University of Oxford, Department of Economics 99101, University of Oxford, Department of Economics.
  23. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  24. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 655-679, June.
  25. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  26. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 36, Federal Reserve Bank of Minneapolis.
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