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Learning and Loss Functions: Comparing Optimal and Operational Monetary Policy Rules

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Abstract

Modern Bayesian tools aided by MCMC techniques allow researchers to estimate models with increasingly intricate dynamics. This paper highlights the application of these tools with an empirical assessment of optimal versus operational monetary policy rules within a standard New Keynesian macroeconomic model with adaptive learning. The question of interest is which of the two policy rules - contemporaneous data or expectations of current variables - better describes the policy undertaken by the U.S. central bank. Results for the data period 1954:III to 2007:I indicate that the data strongly favors contemporaneous expectations over real time data.

Suggested Citation

  • Eric Gaus & Srikanth Ramamurthy, 2012. "Learning and Loss Functions: Comparing Optimal and Operational Monetary Policy Rules," Working Papers 14-01, Ursinus College, Department of Economics, revised 14 Dec 2013.
    • Handle: RePEc:urs:urswps:14-01
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    File URL: http://webpages.ursinus.edu/egaus/Research/IJMMNO_BAYES.pdf
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    References listed on IDEAS

    as
    1. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    2. John Duffy & Wei Xiao, 2007. "The Value of Interest Rate Stabilization Policies When Agents Are Learning," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2041-2056, December.
    3. James Murray, 2008. "Initial Expectations in New Keynesian Models with Learning," Caepr Working Papers 2008-017, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    4. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
    5. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    6. repec:wly:soecon:v:80:2:y:2013:p:439-453 is not listed on IDEAS
    7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    8. Eric Gaus, 2012. "Robust Stability of Monetary Policy Rules under Adaptive Learning," Working Papers 13-01, Ursinus College, Department of Economics, revised 14 Dec 2012.
    9. James Murray, 2008. "Initial Expectations in New Keynesian Models with Learning," CAEPR Working Papers 2008-017, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Adaptive Learning; Rational Expectations; Bayesian Econometrics; MCMC;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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