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

By Andrew T. Levin, Volker Wieland, John C. Williams. Social Science Research Network, 2001

395 citations recorded by the source corpus.

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. In light of these results, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2ce65fa6073e51a66a9644dc432427d66cbf7eb9

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In Economics and Econometrics

Citations in the corpus

Robust Monetary Policy with Competing Reference Models (2003, neutral): “2Consideration of monetary policy under this form of model uncertainty has previously been analyzed by Karakitsos and Rustem (1984), Becker et al. (1986), Frankel and Rockett (1988), Holtham and HughesHallett (1992), Christodoulakis et al. (1993), Levin et al. (1999), and Levin et al. (2003).”
Optimal Monetary Policy When Agents are Learning (2010, neutral): “Combining this result with the boundedness of c πt , the ALM for inflation and output gap (26) and (28) tell us that both these variables go to zero asymptotically, restoring the RE allocations.”
Monetary policy under uncertainty in an estimated model with labor market frictions (2008, background): “While many authors have studied robust monetary policy with parameter and model uncertainty, for example, Levin, Wieland, and Williams (1999, 2003), Leitemo and Söderström (2005), Levin et al. (2005), Batini, Justiniano, Levine, and Pearlman (2006), and Edge, Laubach, and Williams (2007), to our…”
Resilience and robustness in policy design: a critical appraisal (2017, background): “…of decision-makers (who should be conscious that when they design policies, they have to decide which kind of robustness they want and which kind of fragility they risk) and increase the focus on evidence-based processes (Sanderson 2002, 2009; Levin et al. 2003; Shaxson 2005; Howlett 2009).”
A new comparative approach to macroeconomic modeling and policy analysis (2012, methodology): “This model is used for comparison in the robustness analysis of monetary policy rules by Levin et al. (2003). Its structure is similar to the NK_RW97 model presented above, but without explicit treatment of government spending.”
Monetary Policy in a Monetary Union: What Role for Regional Information? (2008, background): “A necessarily incomplete list of recent contributions dealing with these themes includes Peersman and Smets (1999), Taylor (1999a, 1999b), Orphanides (2001), Rudebusch (2001, 2002), Levin, Wieland, and Williams (2003) , and Lubik and Schorfheide (2007).”
Central bank communication and expectations stabilization (2010, positive): “This feature along with other robustness properties noted by Levin, Wieland, and Williams (2003) and Batini and Haldane (1999) have lead to advocacy of forecast-based instrument rules for the implementation of monetary policy.”
Historical monetary policy analysis and the Taylor rule (2003, neutral): “(1999), Batini and Nelson (2000), Clarida, Gali and Gertler (1999, 2000), Levin, Wieland and Williams (1999, 2003) , Nessen (1999) and Orphanides (2001, 2002, 2003).”