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International evidence on the stability of the optimizing IS equation

  • Amit Kara
  • Edward Nelson

In this paper we provide international evidence on the issue of whether the optimizing IS equation is more stable than a backward-looking alternative. The international evidence consist of estimates of IS equations on quarterly data for the UK and Australia, both for the full sample of the last 40 years and for the period following major monetary policy shifts in 1979-80. Our results suggest that the parameters in the optimizing IS equations are more empirically stable than those of the backward-looking alternative. The use of dynamic general equilibrium modelling in empirical work does deliver material benefits, in the form of equations that are more suitable for monetary policy analysis.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-020.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2003-020
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