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Estimated, Calibrated, and Optimal Interest Rate Rules

Estimated, calibrated, and optimal interest rate rules are examined for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. The results show that the estimated interest rate rule used in the paper is stable for the period beginning in 1954 except for the early Volcker period, although more observations, especially high inflation ones, are needed before much confidence can be placed on the results. The models used for the stabilization results are large scale structural macroeconometric models, and some of the results differ from those based on small models. For example, rules with inflation coefficients less than one are not destabilizing, and rules with large inflation coefficients, such as the Taylor rule, achieve a small reduction in inflation variability at a cost of a large increase in interest rate variability.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1258.

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Length: 40 pages
Date of creation: May 2000
Date of revision:
Handle: RePEc:cwl:cwldpp:1258
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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Ray C. Fair & John B. Taylor, 1991. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," NBER Technical Working Papers 0078, National Bureau of Economic Research, Inc.
  2. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
  3. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
  4. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
  5. Todd E. Clark, 1994. "Nominal GDP targeting rules: can they stabilize the economy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-25.
  6. Hall, R.E. & Mankiw, N.G., 1993. "Nominal Income Targeting," Harvard Institute of Economic Research Working Papers 1650, Harvard - Institute of Economic Research.
  7. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
  8. Ray C. Fair & E. Philip Howrey, 1995. "Evaluating Alternative Monetary Policy Rules," Cowles Foundation Discussion Papers 1091, Cowles Foundation for Research in Economics, Yale University.
  9. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
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  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Dean Croushore & Tom Stark, 1995. "Evaluating McCallum's rule for monetary policy," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 3-14.
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  14. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," Computing in Economics and Finance 1999 841, Society for Computational Economics.
  15. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  16. Stephen K. McNees, 1986. "Modeling the Fed: a forward- looking monetary policy reaction function," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-8.
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  18. James W. Christian, 1968. "A Further Analysis Of The Objectives Of American Monetary Policy," Journal of Finance, American Finance Association, vol. 23(3), pages 465-477, 06.
  19. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
  20. Richard Clarida & Jordi GalĂ­ & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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