Evaluating Monetary Policy Strategies: The Case of Italy

Evaluating Monetary Policy Strategies: The Case of Italy (di Carlo Altavilla) - ABSTRACT: The paper analyses the monetary strategy of the Bank of Italy. The problem the Bank of Italy has faced in setting a monetary policy rule is analysed starting from the monetary transmission mechanisms and from the timing and magnitude of monetary shocks. The econometric methodology applied is the Structural Vector Autoregression. Once the structural model has been identified the study focuses on the performance of different monetary policy rules thought to be used as a guideline in practical policy-making. In this respect, different rules are estimated using alternative econometrics techniques. A comparative analysis, based on the ability of the rules in capturing the historical central bank?s behaviour and on the volatility of output, inflation and interest rate changes that they imply, is performed. The results suggest that the simple rules per-form quite well and that the gains obtained from adopting an optimal control-based rule are not so large. Moreover, the addition of a forward-looking dimension as well as an interest rate smoothing term in the reaction function seems to improve the performance of the rules.