New economy : new policy rules?
We wish to understand the implications of recent shifts in US productivity for the structure of optimal monetary policy rules. Accordingly, we augment a standard inflation targeting model in which a forward-looking version of the Taylor rule constitutes the optimal monetary policy with regime switching in productivity, and calculate the optimal rule. We find that a rule that incorporates leading indicators about regimes significantly outperforms the Taylor-type rule. We use this result to comment on the new economy events of the 1990s and the stagflation events of the 1970s.
|Date of creation:||01 Apr 2001|
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356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
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