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Monetary Policy Analysis in Backward-Looking Models

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Author Info
Lindé, Jesper () (Research Department, Central Bank of Sweden)

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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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Publisher 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
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Related research
Keywords: Lucas critique Real business cycle model Taylor rules Aggregate supply Aggregate demand

Other versions of this item:

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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References listed on IDEAS
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  1. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
  2. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics 36, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29, pages 173-203. [Downloadable!] (restricted)
  4. 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, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
    Other versions:
  5. Lindé, Jesper, 1999. "Testing for the Lucas Critique: A Quantitative Investigation," Working Paper Series in Economics and Finance 311, Stockholm School of Economics, revised 09 Mar 1999. [Downloadable!]
    Other versions:
  6. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  8. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    Other versions:
  9. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
    Other versions:
  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. [Downloadable!] (restricted)
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  11. McCallum, Bennett T, 1984. "Monetarist Rules in the Light of Recent Experience," American Economic Review, American Economic Association, vol. 74(2), pages 388-91, May. [Downloadable!] (restricted)
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  12. Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers 99101, University of Oxford, Department of Economics.
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  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
    Other versions:
  14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
  15. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  16. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
  17. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," Working Paper 99-22, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  18. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand. [Downloadable!]
  19. Filippo Altissimo & Stefano Siviero & Daniele Terlizzese, 1999. "How deep are the deep parameters?," Temi di discussione (Economic working papers) 354, Bank of Italy, Economic Research Department. [Downloadable!]
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  20. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers 1998:3, Lund University, Department of Economics, revised 21 Apr 1999. [Downloadable!]
  21. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June. [Downloadable!] (restricted)
    Other versions:
  22. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5, pages 7-29. [Downloadable!] (restricted)
  23. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March. [Downloadable!] (restricted)
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  24. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December. [Downloadable!] (restricted)
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