Report

Optimal interest rate rules and inflation stabilization versus price-level stabilization

Abstract: This paper compares the properties of interest rate rules such as simple Taylor rules and rules that respond to price-level fluctuations?called Wicksellian rules?in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare and robustness to alternative shock processes, and they are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule?that is, a monetary policy rule that implements the optimal plan and is also completely robust to the specification of exogenous shock processes.

Keywords: Taylor's rule; Inflation (Finance); Monetary policy; Price levels; Interest rates;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2012

Number: 546