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The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty

  • Andrew Levin
  • Volker Wieland
  • John C. Williams

We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty; such rules respond to the one-year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803322157016
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 3 (June)
Pages: 622-645

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:3:p:622-645
Note: DOI: 10.1257/000282803322157016
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