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

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 forec...

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Bibliographic Details
Published in:The American economic review 2003-06, Vol.93 (3), p.622-645
Main Authors: Levin, Andrew, Wieland, Volker, Williams, John C.
Format: Article
Language:English
Subjects:
Central banks
Economic forecasting models
Economic forecasts
Economic models
Economic policy
Economic research
Economic theory
Economics
Forecasting models
Inflation
Inflation rates
Interest rates
Macroeconomic modeling
Macroeconomics
Modeling
Monetary policy
Output gaps
Parametric models
Studies
Uncertainty
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/000282803322157016