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Evaluating Interest Rate Rules in an Estimated DSGE Model

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  • Andrea Tambalotti

    (Federal Reserve Bank of New York)

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

  • Vasco Curdia

    (Federal Reserve Bank of New York)

Abstract

The empirical DSGE literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound but their relative merit is rarely discussed. We provide some of this discussion by comparing the fit of a large set of interest rate rules (44 in total), which we estimate as part of a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level — which would prevail in the absence of distortions — have the worst fit within the set we consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.

Suggested Citation

  • Andrea Tambalotti & Andrea Ferrero & Vasco Curdia, 2010. "Evaluating Interest Rate Rules in an Estimated DSGE Model," 2010 Meeting Papers 402, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:402
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    9. Haavio, Markus & Laine, Olli-Matti, 2021. "Monetary policy rules and the effective lower bound in the Euro area," Research Discussion Papers 5/2021, Bank of Finland.
    10. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation," MPRA Paper 57212, University Library of Munich, Germany.
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    13. Almosova, Anna, 2016. "Labor market frictions and monetary policy design," SFB 649 Discussion Papers 2016-054, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    14. Scott Brave & Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano, 2012. "The Chicago Fed DSGE model," Working Paper Series WP-2012-02, Federal Reserve Bank of Chicago.

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