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Solving for Optimal Simple Rules in Rational Expectations Models

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  • Richard Dennis

Abstract

This paper presents techniques to solve for optimal simple monetary policy rules in rational expectations models. Both pre-commitment and discretionary solutions are considered. The techniques described are notable for the flexibility they provide over the structure of the policy rule being solved for. Specifically, not all state variables need enter the rule. This allows rules optimal, conditional on a specified information set or structure, to be easily constructed. The algorithms are illustrated through application to the models in Clarida, Gali, and Gertler (1999) and Rudebusch (2000).

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 30.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:30

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Keywords: Rational expectations; Discretion; Pre-commitment; Policy evaluation;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  2. Leitemo, Kai & Söderström, Ulf, 2001. "Simple Monetary Policy Rules and Exchange Rate Uncertainty," Working Paper Series 122, Sveriges Riksbank (Central Bank of Sweden).
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  8. Smets, Frank, 2000. "What horizon for price stability," Working Paper Series 0024, European Central Bank.
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  10. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
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