Keywords: Simple nonlinear policy rule, signal extraction with non-normal prior, nonlinear updating
Abstract:  Meyer (1999) has suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. This paper offers a theoretical justification for such a nonlinear policy rule, and provides some empirical evidence on the relative performance of linear and nonlinear rules when there is heightened uncertainty about the NAIRU.
Full paper (99 KB PDF)
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Last update: January 6, 2001