Working Paper

International evidence on the stability of the optimizing IS equation

Abstract: In this paper we provide international evidence on the issue of whether the optimizing IS equation is more stable than a backward-looking alternative. The international evidence consist of estimates of IS equations on quarterly data for the UK and Australia, both for the full sample of the last 40 years and for the period following major monetary policy shifts in 1979-80. Our results suggest that the parameters in the optimizing IS equations are more empirically stable than those of the backward-looking alternative. The use of dynamic general equilibrium modelling in empirical work does deliver material benefits, in the form of equations that are more suitable for monetary policy analysis.

Keywords: Monetary policy; Macroeconomics; Econometric models;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2004

Number: 2003-020