Optimal Constrained Interest Rate Rules
AbstractThe monetary policy literature has recently devoted considerable attention to Taylor-type rules, in which the interest rate set by the central bank depends on measures of inï¬‚ation and aggregate output. We show that if policy-makers attempt to choose the optimal rule within a Taylor-type class they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters. We advocate a procedure in which policy-makers restrict attention to rules that lie in the determinate stable region for all plausible calibrations, and which minimize the expected loss, computed using structural parameter priors, subject to this constraint
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 134.
Date of creation: 11 Aug 2004
Date of revision:
Monetary Policy; Taylor Rules; Indeterminacy; E-stability; parameter uncertainty; robust rules.;
Other versions of this item:
- George W. Evans & Bruce McGough, 2005. "Optimal Constrained Interest-rate Rules," University of Oregon Economics Department Working Papers 2005-9, University of Oregon Economics Department, revised 31 May 2006.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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