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The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank

  • Taylor, John B.

    ()

    (Stanford University, Department of Economics)

This paper examines the implications of recent research on monetary policy rules for practical monetary policy making, with special emphasis on strategies for setting interest rates by the new European Central Bank (ECB). The paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules. The paper stresses new results on the robustness of monetary policy rules in which each rule that is optimal or good according to one model or researcher is tested for robustness by other researchers using different models. Because of the large increase in the number of economists focussing on econometric evaluation of monetary policy rules for the interest rate instrument and because of the parallel increase in the variety of models being developed for this purpose, much more evidence is becoming available on the robustness of simle monetary policy rules for the interest rate than ever before.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 649.

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Length: 39 pages
Date of creation: 01 Aug 1998
Date of revision:
Handle: RePEc:hhs:iiessp:0649
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Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden

Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  3. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
  4. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
  5. Acemoglu, D. & Zilibotti, F., 1996. "Agency Costs in the Process of Development," Working papers 96-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Bennett T. McCallum & Edward Nelson, 1998. "Performance of operational policy rules in an estimated semi-classical structural model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  7. Jeffrey C. Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers 94-1, Federal Reserve Bank of Boston.
  8. Hassler, J. & Rodriguez Mora, J.V., 1998. "IQ, Social Mobility and Growth," Papers 635, Stockholm - International Economic Studies.
  9. M. C. Burda, 1995. "Migration and the Option Value of Waiting," SFB 373 Discussion Papers 1995,58, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. Wright, Stephen, 1998. "Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty," Cambridge Working Papers in Economics 9820, Faculty of Economics, University of Cambridge.
  11. Hassler, J. & Lindbeck, A., 1997. "Intergenerational Risk Sharing, Stability and Optimality of Alternative Pension Systems," Papers 631, Stockholm - International Economic Studies.
  12. Persson, Mats & Persson, Torsten & Svensson, Lars E.O., 1997. "Debt, cash flow and inflation incentives: A Swedish example," Seminar Papers 613, Stockholm University, Institute for International Economic Studies.
  13. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
  14. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  15. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  16. Burda, Michael C, 1995. "Unions and Wage Insurance," CEPR Discussion Papers 1232, C.E.P.R. Discussion Papers.
  17. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  18. James E. Anderson, 1997. "Revenue Neutral Trade Reform with Many Households, Quotas and Tariffs," NBER Working Papers 6181, National Bureau of Economic Research, Inc.
  19. Wieland, Volker, 1996. "Monetary policy targets and the stabilization objective: a source of tension in the EMS," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 95-116, February.
  20. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
  21. Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
  22. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  23. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  24. Hassler, J & Rodriguez Mora, J-V, 1997. "Employment Turnover and Unemployment Insurance," Papers 623, Stockholm - International Economic Studies.
  25. Hassler, John & Lindbeck, Assar, 1997. "Optimal actuarial fairness in pension systems: A note," Economics Letters, Elsevier, vol. 55(2), pages 251-255, August.
  26. Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
  27. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Economic Structure and the Decision to Adopt a Common Currency," Center for International and Development Economics Research, Working Paper Series qt0bw0h379, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  28. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
  29. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997. "Social Norms, the Welfare State, and Voting," Seminar Papers 608, Stockholm University, Institute for International Economic Studies.
  30. 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.
  31. John B. Taylor, 1995. "Monetary policy implications of greater fiscal discipline," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 151-170.
  32. Agell, J. & Persson, M., 1998. "Tax Arbitrage and Labour Supply," Papers 647, Stockholm - International Economic Studies.
  33. repec:fip:fedgsq:y:1996:i:mar13 is not listed on IDEAS
  34. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  35. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  36. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
  37. Persson, T. & Roland, G. & Tabellini, G., 1997. "Comparative Politics and Public Finance," Papers 633, Stockholm - International Economic Studies.
  38. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  39. John B. Taylor, 1996. "How should monetary policy respond to shocks while maintaining long-run price stability? Conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 181-195.
  40. John P. Judd & Bharat Trehan, 1995. "Has the Fed gotten tougher on inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar31.
  41. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
  42. 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.
  43. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
  44. Agell, J. & Presson, M., 1997. "Tax Arbitarge and Labor Supply," Papers 1997-26, Uppsala - Working Paper Series.
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