The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty
- (pp. 622-645)
Abstract
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.Citation
Levin, Andrew, Volker Wieland, and John C. Williams. 2003. "The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty ." American Economic Review, 93 (3): 622-645. DOI: 10.1257/000282803322157016JEL Classification
- E52 Monetary Policy
- E17 General Aggregative Models: Forecasting and Simulation: Models and Applications
- E31 Price Level; Inflation; Deflation