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Simple Monetary Policy Rules Under Model Uncertainty

Listed author(s):
  • Peter Isard
  • Douglas Laxton
  • Ann-Charlotte Eliasson

Using stochastic simulations and stability analysis, the paper compares how different monetary policy rules perform in a moderately nonlinear model with a time-varying NAIRU. Rules that perform well in linear models but implicitly embody backward-looking measures of real interest rates (such as conventional Taylor rules) or substantial interest rate smoothing perform very poorly in models with moderate nonlinearities, particularly when policymakers tend to make serially-correlated errors in estimating the NAIRU. This challenges the practice of evaluating policy rules within linear models, in which the consequences of responding myopically to significant overheating are extremely unrealistic. Copyright Kluwer Academic Publishers 1999

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File URL: http://hdl.handle.net/10.1023/A:1008753416708
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 6 (1999)
Issue (Month): 4 (November)
Pages: 537-577

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Handle: RePEc:kap:itaxpf:v:6:y:1999:i:4:p:537-577
DOI: 10.1023/A:1008753416708
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