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Robust inflation-forecast-based rules to shield against indeterminacy

Listed author(s):
  • Batini, Nicoletta
  • Justiniano, Alejandro
  • Levine, Paul
  • Pearlman, Joseph

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 9-10 ()
Pages: 1491-1526

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:9-10:p:1491-1526
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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