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Robustness of Simple Monetary Policy Rules under Model Uncertainty

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  • Economics

Abstract

Robustness of Simple Monetary Policy Rules under Model Uncertainty This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Monetary Policy Rules Volume Author/Editor: John B. Taylor, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-79124-6 Volume URL: http://www.nber.org/books/tayl99-1 Publication Date: January 1999 Chapter Title: Robustness of Simple Monetary Policy Rules under Model Uncertainty Chapter Author: Andrew T.. Levin, Volker Wieland, John Williams Chapter URL: http://www.nber.org/chapters/c7418 Chapter pages in book: (p. 263 - 318) 6 Robustness of Simple Monetary Policy Rules under Model Uncertainty Andrew Levin, Volker Wieland, and John C . Williams 6.1 Introduction In the face of uncertainty about the true structure of the economy, policy- makers may disagree about the macroeconomic effects of monetary policy and thus about the appropriate policy setting. One approach to resolving this prob- lem is to search for monetary policy rules that work well across a wide range of structural models, that is, rules that are robust to model uncertainty.’ In this paper, we investigate the characteristics of policy rules that yield low output and inflation volatility across four different structural macroeconometric mod- els of the U.S. economy: the Federal Reserve Board staff model (cf. Brayton, Levin, et al. 1997), the Monetary Studies Research model of Orphanides and Wieland (1998); the Fuhrer-Moore (1995) model, and Taylor’s (1993b) multi- country model-henceforth referred to as the FRB, MSR, and FM models and Andrew Levin, Volker Wieland, and John C. Williams are economists at the Board of Governors of the Federal Reserve System. The authors appreciate the excellent research assistance of Steven Summer, as well as helpful comments from Flint Brayton, Larry Christiano, David Lindsey, Athanasios Orphanides, David Reifschneider, John Taylor, Robert Tetlow, an

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