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The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area

  • Adalid, Ramon
  • Coenen, Gunter
  • McAdam, Peter
  • Siviero, Stefano

In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.

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File URL: https://mpra.ub.uni-muenchen.de/821/1/MPRA_paper_821.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 821.

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Date of creation: 10 Feb 2005
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Publication status: Published in International Journal of Central Banking Number 1.Volume(2005): pp. 95-132
Handle: RePEc:pra:mprapa:821
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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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  8. Batini, Nicoletta & Nelson, Edward, 2000. "Optimal Horizons for Inflation Targeting," Working Paper Series 103, Sveriges Riksbank (Central Bank of Sweden).
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  11. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2002. "The Performance and Robustness of Simple Monetary Policy Rules in Models of the Canadian Economy," Technical Reports 92, Bank of Canada.
  12. Gerdesmeier, Dieter & Roffia, Barbara, 2003. "Empirical estimates of reaction functions for the euro area," Working Paper Series 0206, European Central Bank.
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