IMF Working Papers

Simple Monetary Policy Rules Under Model Uncertainty

By Ann-Charlotte Eliasson, Peter Isard, Douglas Laxton

May 1, 1999

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Ann-Charlotte Eliasson, Peter Isard, and Douglas Laxton. Simple Monetary Policy Rules Under Model Uncertainty, (USA: International Monetary Fund, 1999) accessed December 3, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using stochastic simulations and stability analysis, the paper compares how different monetary rules perform in a moderately nonlinear model with a time-varying nonaccelerating-inflation-rate-of-unemployment (NAIRU). Rules that perform well in linear models but implicitly embody backward-looking measures of real interest rates (such as conventional Taylor rules) or substantial interest rate smoothing perform very poorly in models with moderate nonlinearities, particularly when policymakers tend to make serially correlated errors in estimating the NAIRU. This challenges the practice of evaluating rules within linear models, in which the consequences of responding myopically to significant overheating are extremely unrealistic.

Subject: Financial services, Inflation, Inflation targeting, Labor, Monetary policy, Prices, Real interest rates, Unemployment, Unemployment rate

Keywords: Global, Inflation, Inflation expectation, Inflation targeting, Interest rate, Macroeconomic models, Monetary policy, Monetary policy rules, NAIRU uncertainty, Phillips curve, Phillips curve paradigm, Policy rule, Reaction function, Real interest rates, Taylor rule, Unemployment, Unemployment gap, Unemployment rate, WP

Publication Details

  • Pages:

    60

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1999/075

  • Stock No:

    WPIEA0751999

  • ISBN:

    9781451849714

  • ISSN:

    1018-5941

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