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How Useful are Simple Rules for Monetary Policy? The Swedish Experience

  • Berg, Claes

    ()

    (Monetary Policy Department, Central Bank of Sweden)

  • Jansson, Per

    ()

    (Monetary Policy Department, Central Bank of Sweden)

  • Vredin, Anders

    ()

    (Monetary Policy Department, Central Bank of Sweden)

Monetary policy is often analysed in terms of simple rules. Such rules may be useful for many purposes, even when they do not describe the actual monetary policy strategy exactly. This paper compares monetary policy in Sweden during the inflation-targeting regime 19932002 with the policies implied by certain simple instrument rules. Calibrated rules that are commonly used in theoretical analyses do not provide good approximations of Sveriges Riksbank’s (the central bank of Sweden) policy, whereas rules with reaction coefficients that have been estimated using the bank’s own (realtime forecasts do capture policy behaviour quite well. There are different forecastbased rules including different arguments and forecast horizons that describe monetary policy about equally well. A close reading of various policy documents, e.g., Inflation Reports, minutes from the bank’s Executive Board meetings, and speeches, shows that large deviations from the simple rules are associated with factors that are usually neglected in theoretical models of monetary policy. Examples of such factors are concerns for credibility and uncertainties about various economic relationships.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 169.

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Length: 44 pages
Date of creation: 01 Aug 2004
Date of revision:
Handle: RePEc:hhs:rbnkwp:0169
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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  20. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
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  25. Kenneth N. Kuttner, 2004. "The role of policy rules in inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 89-112.
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