Adalid, Ramon and Coenen, Gunter and McAdam, Peter and Siviero, Stefano (2005): The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area. Published in: International Journal of Central Banking , Vol. Volume, No. Number 1 (13. June 2005): pp. 95-132.
Download (288kB) | Preview
In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.
|Item Type:||MPRA Paper|
|Original Title:||The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area|
|Keywords:||macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area|
|Subjects:||G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G0 - General
|Depositing User:||Terry Woodard|
|Date Deposited:||21. Nov 2006|
|Last Modified:||15. Feb 2013 09:14|
Anderson, Gary S., and George R. Moore. 1985. “A Linear Algebraic Procedure for Solving Linear Perfect Foresight Models.” Economics Letters 17:247–52.
Angelini, Paolo, Paolo Del Giovane, Stefano Siviero, and Daniele Terlizzese. 2002. “Monetary Policy Rules for the Euro Area: What Role for National Information?” Temi di Discussione No. 457, Banca d’Italia (December).
Angeloni, Ignazio, Gunter Coenen, and Frank Smets. 2003. “Persistence,the Transmission Mechanism and Robust Monetary Policy.” Scottish Journal of Political Economy 50:527–49.
Batini, Nicoletta, and Andrew Haldane. 1999. “Forward-Looking Rules for Monetary Policy.” In Monetary Policy Rules, ed. John B. Taylor, 157–92. Chicago: NBER and University of Chicago Press.
Batini, Nicoletta, and Edward Nelson. 2001. “Optimal Horizons for Inflation Targeting.” Journal of Economic Dynamics and Control 25:891–910.
Blanchard, Olivier J., and Charles Kahn. 1980. “The Solution of Linear Difference Models Under Rational Expectations.” Econometrica 48:1305–11.
Bryant, Ralph C., Peter Hooper, and Catherine L. Mann, eds. 1993. Evaluating Policy Regimes: New Research in Empirical Macroeconomics. Washington, DC: Brookings Institution.
Calvo, Guillermo A. 1983. “Staggered Prices in a Utility-Maximizing Framework.” Journal of Monetary Economics 12:383–98.
Chari, V. V., Patrick J. Kehoe, and Ellen R. McGrattan. 2000. “Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?” Econometrica 68:1151–80.
Clarida, Richard, Jordi Gal´ı, and Mark Gertler. 1998. “Monetary Policy Rules in Practice: Some International Evidence.” European Economic Review 42:1033–67.
Coenen, Gunter. 2003. “Inflation Persistence and Robust Monetary Policy Design.” ECB Working Paper No. 290, European Central Bank (November).
Coenen, Gunter, and Volker Wieland. 2000. “A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities.” ECB Working Paper No. 30, European Central Bank (September), forthcoming in European Economic Review.
Cˆot´e, Denise, John Kuszczak, Jean-Paul Lam, Ying Liu, and Pierre St-Amant. 2002. “The Performance and Robustness of Simple Monetary Policy Rules in Models of the Canadian Economy.” Technical Report 92, Bank of Canada.
Dieppe, Alistair, Keith K¨uster, and Peter McAdam. 2004. “Optimal Monetary Policy Rules for the Euro Area: An Analysis Using the Area Wide Model.” ECB Working Paper No. 360, European Central Bank (May), forthcoming in Journal of Common Market Studies.
Fagan, Gabriel, Jerome Henry, and Ricardo Mestre. 2001. “An Area-Wide Model (AWM) for the Euro Area.” ECB Working Paper No. 42, European Central Bank (January), forthcoming in Economic Modelling.
Finan, Frederico S., and Robert J. Tetlow. 1999. “Optimal Control of Large, Forward-Looking Models: Efficient Solutions and Two Examples.” Finance and Economics Discussion Series, 99-51, Board of Governors of the Federal Reserve System (October).
Fuhrer, Jeffrey C., and George R. Moore. 1995. “Inflation Persistence.” Quarterly Journal of Economics 110:127–60.
Gerdesmeier, Dieter, and Barbara Roffia. 2004. “Empirical Estimates of Reaction Functions for the Euro Area.” Swiss Journal of Economics and Statistics 140:37–66.
Giannoni, Marc P. 2002. “Does Model Uncertainty Justify Caution? Robust Monetary Policy in a Forward-Looking Model.” Macroeconomic Dynamics 6:111–44.
Giannoni, Marc P., and Michael Woodford. 2002. “Optimal Interest Rates: I. General Theory.” NBER Working Paper No. 9419 (December).
Hansen, Lars P., and Thomas J. Sargent. 2002. “Robust Control and Model Uncertainty in Macroeconomics.” Unpublished Book Manuscript, University of Chicago and Hoover Institution.
King, Robert, and Alexander Wolman. 1999. “What Should the Monetary Authority Do When Prices Are Sticky?” In Monetary Policy Rules, ed. John B. Taylor. Chicago: NBER and University of Chicago Press.
Levin, Andrew T., Volker Wieland, and John C. Williams. 1999. “Robustness of Simple Policy Rules under Model Uncertainty.” In Monetary Policy Rules, ed. John B. Taylor, 263–99. Chicago: NBER and University of Chicago Press.
Levin, Andrew T., Volker Wieland, and John C. Williams. 2003. “The Performance of Forecast-Based Monetary Policy Rules under Model Uncertainty.” American Economic Review 93:622–45.
Levin, Andrew T., and John C. Williams. 2003. “Robust Monetary Policy with Competing Reference Models.” Journal of Monetary Economics 50:945–75.
McCallum, Bennett T. 1988. “Robustness Properties of a Rule for Monetary Policy.” Carnegie Rochester Conference Series on Public Policy 29:173–204.
Monteforte, Libero, and Stefano Siviero. 2002. “The Economic Consequences of Euro-Area Modeling Shortcuts.” Temi di Discussione No. 458, Banca d’Italia (December).
Onatski, Alexei, and James H. Stock. 2002. “Robust Monetary Policy under Model Uncertainty in a Small Model of the U.S. Economy.” Macroeconomic Dynamics 6:85–110.
Onatski, Alexei, and Noah Williams. 2003. “Modelling Model Uncertainty.” Mimeo, Columbia University and Princeton University (February).
Orphanides, Athanasios, and John C. Williams. 2002. “Robust Monetary Policy Rules with Unknown Natural Rates.” Brookings Papers on Economic Activity 2:63–145.
Rotemberg, Julio J., and Michael Woodford. 1997. “An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy.” In NBER Macroeconomics Annual, Vol. 12, ed. Ben S. Bernanke and Julio J. Rotemberg, 297–346. Cambridge, MA: MIT Press.
Rudebusch, Glenn D., and Lars E.O. Svensson. 1999. “Policy Rules for Inflation Targeting.” In Monetary Policy Rules, ed. John B. Taylor, 203–53. Chicago: NBER and University of Chicago Press.
Smets, Frank, and Raf Wouters. 2002. “Output Gaps: Theory versus Practice.” Mimeo, European Central Bank (December).
Smets, Frank, and Raf Wouters. 2003. “An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association 1:1123–75.
Svensson, Lars E.O. 1999. “Inflation Targeting: Some Extensions.” Scandinavian Journal of Economics 101:337–61.
Svensson, Lars E.O. 2003. “What is Wrong with Taylor Rules? Using Judgement in Monetary Policy through Targeting Rules.” Journal of Economic Literature 41:426–77.
Taylor, John B. 1980. “Aggregate Dynamics and Staggered Contracts.” Journal of Political Economy 88:1–24.
Taylor, John B. 1993. “Discretion Versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39:195–214.
Taylor, John B., ed. 1999. Monetary Policy Rules. Chicago: NBER and University of Chicago Press.
Tetlow, Robert J., and Peter von zur Muehlen. 2001. “Robust Monetary Policy with Misspecified Models: Does Model Uncertainty Always Call for Attenuated Policy?” Journal of Economic Dynamics and Control 25:911–49.
Williams, John C. 2003. “Simple Rules for Monetary Policy.” In FRBSF Economic Review, 1–12. San Francisco: Federal Reserve Bank of San Francisco.