Inflation, Price Level and Hybrid Rules under Inflation Uncertainty

The performance and robustness of optimised interest rate rules are analysed in a New Keynesian model estimated for the euro area economy. In particular, we examine the properties of rules responding to inflation, the price level, or a combination of the two (a hybrid rule). All the rules also respond to the output gap. The optimal hybrid rule is only marginally superior when there is no model uncertainty. When there is uncertainty about the degree of inflation persistence, the inflation rule is the most robust rule and the performance of the other two rules deteriorates. However, all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers’ estimate.