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Interest Rate Rules and the Response to the Output Gap

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  • Juan Paez-Farrell

    (Hull University)

Abstract

Modern monetary policy analysis is built around the concept of an interest rate rule that responds to both inflation and output. This paper evaluates the quantitative implications of having a policy rule target different definitions of the output gap in a New Keynesian model with endogenous capital. One crucial result is that different model specifications result in alternative values for potential output, raising the issue of which output gap to target. The results of this paper suggest that targeting the true output gap can be well approximated by a rule that only reacts to inflation.

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File URL: http://128.118.178.162/eps/mac/papers/0503/0503016.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0503016.

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Length: 19 pages
Date of creation: 21 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0503016

Note: Type of Document - pdf; pages: 19
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Web page: http://128.118.178.162

Related research

Keywords: Monetary Policy Rules; Output Gap;

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  1. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  3. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
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