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An Encompassing Framework For Evaluating Simple Monetary Policy Rules

Author

Listed:
  • Karen Dury

    (National Institute of Economic and Social Research)

  • Ray Barell

    (National Institute of Economic and Social Research)

  • Ian Hurst

    (National Institute of Economic and Social Research)

Abstract

In this paper we build an encompassing framework to analyse the stability conditions associated with various policy rules. Taylor and others have argued that model stability requires interest rate policy rules to have an inflation feedback parameter greater than one. In a world where there are nominal rigidities in the short-term evolution of demand this may not be the case. We show that with a combined nominal GDP and inflation targeting rule, this stability condition is overly restrictive. We use stochastic simulations to evaluate various monetary policy rules, and parameterisations, that are nested within a general framework. We do this using the National Institutes Global Econometric Model, NiGEM, which combines a neo-classical structure and rational expectations with institutional detail. Our results show that while one rule may be the most effective at stabilising the EMU aggregates, another may be more effective for individual economies, implying a change in the covariance structure of output and inflation within EMU. We discuss the resulting covariance structure and their implications for decision making within the ECB.

Suggested Citation

  • Karen Dury & Ray Barell & Ian Hurst, 2000. "An Encompassing Framework For Evaluating Simple Monetary Policy Rules," Computing in Economics and Finance 2000 184, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:184
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    References listed on IDEAS

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    1. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
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    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
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