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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The performance of forecast-based monetary policy rules under model uncertainty
Andrew T. Levin
Volker W. Wieland
John C. Williams
Abstract

We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty: such rules respond to the one-year ahead inflation forecast and to the current output gap, and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. In light of these results, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.


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Andrew T. Levin & Volker W. Wieland & John C. Williams, The performance of forecast-based monetary policy rules under model uncertainty, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2001-39, 2001.
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Keywords: Monetary policy ; Econometric models ; Inflation (Finance)
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