Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099745 | Journal of Economic Dynamics and Control | 2006 | 36 Pages |
Abstract
This paper provides a first attempt to quantify and at the same time utilize estimated measures of uncertainty for the design of robust interest rate rules. We estimate several variants of a linearized form of a New Keynesian model using quarterly US data. Both our theoretical and numerical results indicate that inflation-forecast-based (IFB) rules are increasingly prone to the problem of indeterminacy as the forward horizon increases. As a consequence the stabilization performance of optimized rules of this type worsens too. Robust IFB rules can be designed to avoid indeterminacy in an uncertain environment, but at an increasing utility loss as rules become more forward-looking.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Nicoletta Batini, Alejandro Justiniano, Paul Levine, Joseph Pearlman,