Keywords: Natural rate of interest, natural rate of unemployment, rational expectations, learning, monetary policy rules.
Abstract: We examine the performance and robustness of monetary policy rules
when the central bank and the public have imperfect knowledge of the
economy and continuously update their estimates of model parameters.
We find that versions of the Taylor rule calibrated to perform well
under rational expectations with perfect knowledge perform very
poorly when agents are learning and the central bank faces
uncertainty regarding natural rates. In contrast, difference rules,
in which the change in the interest rate is determined by the inflation
rate and the change in the unemployment rate, perform well when
knowledge is both perfect and imperfect.
Full paper (168 KB PDF)
Home | FEDS | List of 2005 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: November 8, 2005