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The performance of forecast-based monetary policy rules under model uncertainty

Listed author(s):
  • Levin, Andrew
  • Wieland, Volker
  • Williams, John C.

We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty: such rules respond to the one- year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2003/06.

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Date of creation: 2003
Handle: RePEc:zbw:cfswop:200306
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