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Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy

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Author Info
Nicoletta Batini (International Monetary Fund)
Alejandro Justiniano (International Monetary Fund)
Paul Levine (University of Surrey)
Joseph Pearlman (London Metropolitan University)

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Abstract

This paper provides a first attempt to quantify and at the same time utilize estimated measures of uncertainty for the design of robust interest rate rules. We estimate several variants of a linearized form of a New Keynesian model using quarterly US data. Both our theoretical and numerical results indicate that Inflation-Forecast-Based (IFB) rules are increasingly prone to the problem of indeterminacy as the forward horizon increases. As a consequence the stabilization performance of optimized rules of this type worsens too. Robust IFB rules can be designed to avoid indeterminacy in an uncertain environment, but at an increasing utility loss as rules become more forward-looking.

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Publisher Info
Paper provided by Department of Economics, University of Surrey in its series Department of Economics Discussion Papers with number 0804.

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Length: 46 pages
Date of creation: Sep 2004
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Handle: RePEc:sur:surrec:0804

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Related research
Keywords: robustness Taylor rules inflation-forecast-based rules indeterminacy

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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  5. Malcolm D. Knight & Chair, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 361-371. [Downloadable!]
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  7. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA. [Downloadable!]
  8. Nicoletta Batini & Joseph Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Discussion Papers 08, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James B. Bullard & Aarti Singh, 2007. "Worldwide macroeconomic stability and monetary policy rules," Working Papers 2006-040, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Vasco Gabriel & Paul Levine & Christopher Spencer, 2008. "How forward-looking is the Fed? Direct estimates from a `Calvo-type' rule," Department of Economics Discussion Papers 0508, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
    Other versions:
  4. Paul Levine & Joseph Pearlman & Bo Yang, 2007. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Department of Economics Discussion Papers 1807, Department of Economics, University of Surrey. [Downloadable!]
  5. Paul Levine & Joseph Pearlman & George Perendia, 2007. " Estimating DSGE Models under Partial Information," CDMA Working Paper Series 0722, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
  6. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 77-110, December. [Downloadable!]
    Other versions:
  7. Meixing DAI & Eleftherios SPYROMITROS, 2008. "Monetary policy, asset prices and model uncertainty," Working Papers of BETA 2008-15, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  8. Paul Levine & Joseph Pearlman & Richard Pierse, 2006. "Linear-Quadratic Approximation, Efficiency and Target-Implementability," Computing in Economics and Finance 2006 441, Society for Computational Economics. [Downloadable!]
  9. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Quantifying and sustaining welfare gains from monetary commitment," Working Paper Series 709, European Central Bank. [Downloadable!]
  10. Paul Levine & Joseph Pearlman, 2008. "Robust monetary rules under unstructured and structured model uncertainty," Working Paper Series 899, European Central Bank. [Downloadable!]
    Other versions:
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