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The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area

  • Ramón Adalid

    (European Central Bank)

  • Günter Coenen

    (European Central Bank)

  • Peter McAdam

    (European Central Bank)

  • Stefano Siviero

    (Banca d'Italia)

In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 1 (2005)
Issue (Month): 1 (May)

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Handle: RePEc:ijc:ijcjou:y:2005:q:2:a:3
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