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An encompassing framework for evaluating simple monetary policy rules

Author

Listed:
  • Ray Barrell
  • Dr Ian Hurst

Abstract

Taylor and others have argued that model stability requires interest rate policy rules have an inflation feedback parameter greater than one. In this paper we build an encompassing framework to analyse the stability conditions of various policy rules on Taylor's model and in a world where there are nominal rigidities in the short-term evolution of demand. We conclude that with a combined nominal GDP and inflation targeting rule, this stability condition is not necessary. We use stochastic simulations on NiGEM to evaluate different parameterisations of the rules. We discuss the resulting covariance structures and discuss their implications for the ECB.

Suggested Citation

  • Ray Barrell & Dr Ian Hurst, 1999. "An encompassing framework for evaluating simple monetary policy rules," National Institute of Economic and Social Research (NIESR) Discussion Papers 156, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:156
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    Cited by:

    1. Janine Aron & John Muellbauer, 2002. "Estimating Monetary Policy Rules for South Africa," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 15, pages 427-476, Central Bank of Chile.
    2. Dury, Karen & Pina, Alvaro M., 2003. "Fiscal policy in EMU: simulating the operation of the Stability Pact," Journal of Policy Modeling, Elsevier, vol. 25(2), pages 179-206, February.
    3. Ali Al-Eyd, 2006. "Financial Crisis, Effective Policy Rules and Bounded Rationality in a New Keynesian Framework," National Institute of Economic and Social Research (NIESR) Discussion Papers 272, National Institute of Economic and Social Research.
    4. Ali Al-Eyd & Stephen Hall, 2012. "Financial crisis, effective policy rules and bounded rationality in a New Keynesian framework," Economic Change and Restructuring, Springer, vol. 45(1), pages 25-44, February.
    5. Janine Aron, 2000. "Monetary Transmission and Policy Rules in South Africa," Econometric Society World Congress 2000 Contributed Papers 1627, Econometric Society.

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