Robust inflation-forecast-based rules to shield against indeterminacy

Batini, Nicoletta; Justiniano, Alejandro; Levine, Paul; Pearlman, Joseph

doi:10.1016/j.jedc.2005.08.010

Cited by 36 publications

(23 citation statements)

References 48 publications

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“…This implies that fixing a short-term horizon may be an alternative to an aggressive interest rates policy. This complements earlier findings from models with sticky prices (Batini and Pearlman, 2002, Batini et al 2004, 2006, Levine et al 2007). …”

Section: Introductionsupporting

confidence: 87%

“…choose a large  0 * ( * )) monetary policy or a large   if Ω  is infinite. With Lemmas 5 and 6, we conclude that reducing the forecasting horizon can be an alternative to an aggressive mon- and Batini et al (2006). The main message we can take from this is that feedback should be at a horizon less than where equilibrium is reached.…”

Section: Lemma 5 Implies That Local Indeterminacy Of Active Monetary mentioning

confidence: 73%

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Bounded interest rate feedback rules in continuous-time

d’Albis

Augeraud-Véron²,

Hupkes

2014

Journal of Economic Dynamics and Control

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This paper analyses the dynamic consequences of interest rate feedback rules in a flexible-price model where money enters the utility function. Two alternative rules are considered based on past or predicted inflation rates. The main feature is to consider inflation rates that are selected over a bounded time horizon. We prove that if the Central Bank's forecast horizon is not too long, an active and forward-looking monetary policy is not destabilizing: the equilibrium trajectory is unique and monotonic. This is an advantage with respect to active and backward-looking policies that are shown to lead to a unique but fluctuating dynamic. JEL Classification: E31, E43, E52.

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Section: Introductionsupporting

confidence: 87%

Section: Lemma 5 Implies That Local Indeterminacy Of Active Monetary mentioning

confidence: 73%

Bounded interest rate feedback rules in continuous-time

d’Albis

Augeraud-Véron²,

Hupkes

2014

Journal of Economic Dynamics and Control

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“…where = 0:99 is calibrated and Bayesian-estimated parameters, using US data, are = 3:91 and = 1:41 (see Batini et al 2006). All estimated rules achieve saddlepath stability, and are highly robust to variations in these values.…”

Section: Empirical Analysismentioning

confidence: 99%

How forward-looking is the Fed? Direct estimates from a ‘Calvo-type’ rule

Gabriel¹,

Levine²,

Spencer³

2009

Economics Letters

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We estimate an alternative type of monetary policy rule according to which the central bank targets a discounted in…nite sum of expected in ‡ation and output gaps. Empirical results suggest that the Fed has a mean forward horizon of 4 to 8 quarters.Key Words: Calvo-type interest rules; In ‡ation Forecast Based rules; GMM; Indeterminacy JEL Classi…cation: C22; E58We thank a referee for helpful comments. We are also grateful to Athanasios Orphanides for providing the real-time dataset used in the paper. The …rst author acknowledges …nancial support from ESRC grant RES-061-25-0115. The usual disclaimer applies.y Corresponding author. Address:

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“…28 Finally, using estimates for posterior model probabilities and, for each model variant, estimates of the posterior densities of the parameters, a consistently Bayesian approach to both the estimation and the design of robust interest rate rules can be employed as in Batini et al (2006).…”

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confidence: 99%

Quantifying and sustaining welfare gains from monetary commitment

Levine

McAdam

Pearlman

2008

Journal of Monetary Economics

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The objectives of this paper are : first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household's utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment: our central estimate is a 0.4 − 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule. JEL Classification: E52, E37, E58Keywords: Monetary rules, commitment, discretion, welfare gains. ECB Working Paper Series No 709 January 2007 Non-technical SummaryThis paper has three principle objectives. First, to quantify the stabilization gains from commitment in terms of household welfare. Second, to examine how commitment to an optimal or approximately optimal rule can be sustained as an equilibrium in which reneging hardly ever occurs. And finally, to find a simple interest rate rule that closely approximates the optimal commitment (and complex) rule.We utilize an influential empirical micro-founded dynamic stochastic general equilibrium (DSGE) model of the euro area in which there are four sources of time-inconsistency: from forward-looking pricing, consumption, investment and wage setting. In the absence of commitment, following a shock which diverts the economy from its steady state and given expectations of inflation, the opportunist policy-maker can increase or decrease output by reducing or increasing the interest rate which increases or decreases inflation. This results in a higher variability of inflation and the nominal interest rate under discretion. The latter means that the interest rate zero lower bound constraint is tighter under discretion and its presence increases the stabilization gains from commitment. The constraint can be relaxed by increasing the steady state inflation rate, but at a cost of an increase in the deterministic component of the welfare loss.In terms of methodology our welfare-based loss function uses the 'small distortions' quadratic approximation to the consumer's utility which is accurate if the steady state is close to the social optimum. In assessing this condition we highlight a neglected aspect of typical New Keynesian models: external habit in consumption tends to make labour supply and the natural rate of output too high compared with the social optimum. If the habit effect is sufficiently high and labour market and product market distortions are not too big then, ...

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Robust inflation-forecast-based rules to shield against indeterminacy

Cited by 36 publications

References 48 publications

Bounded interest rate feedback rules in continuous-time

Bounded interest rate feedback rules in continuous-time

How forward-looking is the Fed? Direct estimates from a ‘Calvo-type’ rule

Quantifying and sustaining welfare gains from monetary commitment

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