Robustifying optimal monetary policy using simple rules as cross-checks
There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.
|Date of creation:||Nov 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles|
Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Web page: https://www.nbb.be/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John B. Taylor & Volker Wieland, 2012.
"Surprising Comparative Properties of Monetary Models: Results from a New Model Database,"
The Review of Economics and Statistics,
MIT Press, vol. 94(3), pages 800-816, August.
- Taylor, John B. & Wieland, Volker, 2012. "Surprising comparative properties of monetary models: Results from a new model database," IMFS Working Paper Series 66, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
- Taylor, John B. & Wieland, Volker, 2010. "Surprising comparative properties of monetary models: Results from a new model database," Working Paper Series 1261, European Central Bank.
- Peter Tillmann, 2011.
"Cross-Checking Optimal Monetary Policy with Information from the Taylor Rule,"
MAGKS Papers on Economics
201132, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
- Tillmann, Peter, 2012. "Cross-checking optimal monetary policy with information from the Taylor rule," Economics Letters, Elsevier, vol. 117(1), pages 204-207.
- Lars E.O. Svensson, 2010.
NBER Working Papers
16654, National Bureau of Economic Research, Inc.
- Taylor, John B. & Williams, John C., 2010.
"Simple and Robust Rules for Monetary Policy,"
Handbook of Monetary Economics,
in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859
- John B. Taylor & John C. Williams, 2010. "Simple and Robust Rules for Monetary Policy," NBER Working Papers 15908, National Bureau of Economic Research, Inc.
- John B. Taylor & John C. Williams, 2010. "Simple and robust rules for monetary policy," Working Paper Series 2010-10, Federal Reserve Bank of San Francisco.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbb:reswpp:201311-245. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.