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The Performance of Forecast-Based Monetary Policy Rules under Model Uncertainty

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Author Info
Andrew Levin () (Federal Reserve Board, Washington)
Volker Wieland () (Goethe University Frankfurt and CFS)
John C. Williams () (Federal Reserve Bank of San Francisco)

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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.

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

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Length: 35 pages
Date of creation: 06 Jan 2003
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Handle: RePEc:cfs:cfswop:wp200306

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Related research
Keywords: Inflation forecast targeting; optimal monetary policy;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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