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Solving for Optimal Simple Rules in Rational Expectations Models

Listed author(s):
  • Richard Dennis

This paper presents techniques to solve for optimal simple monetary policy rules in rational expectations models. Both pre-commitment and discretionary solutions are considered. The techniques described are notable for the flexibility they provide over the structure of the policy rule being solved for. Specifically, not all state variables need enter the rule. This allows rules optimal, conditional on a specified information set or structure, to be easily constructed. The algorithms are illustrated through application to the models in Clarida, Gali, and Gertler (1999) and Rudebusch (2000).

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 30.

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Date of creation: 01 Apr 2001
Handle: RePEc:sce:scecf1:30
Contact details of provider: Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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  1. Fuhrer, Jeffrey C, 1997. "Inflation/Output Variance Trade-Offs and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 214-234, May.
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  3. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. Nicoletta Batini & Richard Harrison & Stephen P. Millard, 2001. "Monetary policy rules for an open economy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Richard Dennis, 2001. "Optimal policy in rational-expectations models: new solution algorithms," Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  9. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  10. Ulf Soderstrom & Richard Dennis, 2003. "How Important is Precommitment for Monetary Policy?," Computing in Economics and Finance 2003 49, Society for Computational Economics.
  11. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
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  29. Smets, Frank, 2000. "What horizon for price stability," Working Paper Series 0024, European Central Bank.
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  39. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
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