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Optimal Constrained Interest Rate Rules

  • Bruce McGough
  • George Evans

The monetary policy literature has recently devoted considerable attention to Taylor-type rules, in which the interest rate set by the central bank depends on measures of inflation and aggregate output. We show that if policy-makers attempt to choose the optimal rule within a Taylor-type class they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters. We advocate a procedure in which policy-makers restrict attention to rules that lie in the determinate stable region for all plausible calibrations, and which minimize the expected loss, computed using structural parameter priors, subject to this constraint

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 134.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:134
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  1. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
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  14. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
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  28. Kaushik Mitra & Seppo Honkapohja, 2004. "Performance of Monetary Policy with Internal Central Bank Forecasting," Royal Holloway, University of London: Discussion Papers in Economics 04/18, Department of Economics, Royal Holloway University of London, revised Jul 2004.
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  34. repec:ucp:bknber:9780226044712 is not listed on IDEAS
  35. Nicoletta Batini & Alejandro Justiniano & Paul Levine & Joseph Pearlman, 2004. "Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy," School of Economics Discussion Papers 0804, School of Economics, University of Surrey.
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