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Optimal Constrained Interest-rate Rules

  • George W. Evans


    (University of Oregon Economics Department)

  • Bruce McGough


    (Oregon State University Economics Department)

We show that if policy-makers compute the optimal unconstrained interest-rate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2005-9.

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Length: 35
Date of creation: 19 May 2005
Date of revision: 31 May 2006
Handle: RePEc:ore:uoecwp:2005-9
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