The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty
- 1 May 2003
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 93 (3) , 622-645
- https://doi.org/10.1257/000282803322157016
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.Keywords
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