Optimal constrained interest-rate rules

George W Evans, Bruce Mcgough

    Research output: Contribution to journalArticlepeer-review

    13 Citations (Scopus)

    Abstract

    We show that if policymakers compute the optimal unconstrained interestrate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.

    Original languageEnglish
    Pages (from-to)1335-1356
    Number of pages22
    JournalJournal of Money, Credit and Banking
    Volume39
    Issue number6
    Publication statusPublished - Sept 2007

    Keywords

    • monetary policy
    • Taylor rules
    • indeterminacy
    • learning
    • E-stability
    • parameter uncertainty
    • robust rules
    • MONETARY-POLICY RULES
    • SUNSPOT EQUILIBRIA
    • MODELS
    • STABILITY
    • EXPECTATIONS
    • INDETERMINACY
    • PERFORMANCE

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