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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)

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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Bibliographic Info

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

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

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Web page: http://www.surrey.ac.uk/economics/
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Related research

Keywords: robustness; Taylor rules; inflation-forecast-based rules; indeterminacy;

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References

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