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Monetary Policy Analysis in Backward-Looking Models

  • Jesper LINDE

In this paper, I use a dynamic general equilibrium model to quantify how sensitive a typical backward-looking model used in monetary policy analysis is to the Lucas critique. The results show that the backward-looking model exhibit significant parameter instability that is economically important, but that a standard econometric test for detecting this instability fails to do so accurately in small samples. These findings suggest that the relative merits of alternative monetary policy rules should be checked in an equilibrium framework.

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File URL: http://www.jstor.org/stable/20076346
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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2002)
Issue (Month): 67-68 ()
Pages: 155-182

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Handle: RePEc:adr:anecst:y:2002:i:67-68:p:07
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  1. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  2. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  3. Lindé, Jesper, 2000. "Testing for the Lucas Critique: A Quantitative Investigation," Working Paper Series 113, Sveriges Riksbank (Central Bank of Sweden).
  4. Bennett T. McCallum, 1984. "Monetarist Rules in the Light of Recent Experience," NBER Working Papers 1277, National Bureau of Economic Research, Inc.
  5. Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers 99101, University of Oxford, Department of Economics.
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  8. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers 1998:3, Lund University, Department of Economics, revised 21 Apr 1999.
  9. ENGLE, Robert F. & HENDRY, David F. & RICHARD, Jean-François, . "Exogeneity," CORE Discussion Papers RP -516, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March.
  10. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
  11. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
  12. Jeff Fuhrer & Arturo Estrella, 1999. "Are 'Deep' Parameters Stable? The Lucas Critique as an Empirical Hypothesis," Computing in Economics and Finance 1999 621, Society for Computational Economics.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  15. Filippo Altissimo & Stefano Siviero & Daniele Terlizzese, 1999. "How deep are the deep parameters?," Temi di discussione (Economic working papers) 354, Bank of Italy, Economic Research and International Relations Area.
  16. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
  17. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  18. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  21. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  22. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
  23. Geweke, John, 1985. "Macroeconometric Modeling and the Theory of the Representative Agent," American Economic Review, American Economic Association, vol. 75(2), pages 206-10, May.
  24. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  25. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  26. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics 36, Federal Reserve Bank of Minneapolis.
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