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The performance and robustness of simple monetary policy rules in models of the Canadian economy
Author(s) -
Côté Denise,
Kuszczak John,
Lam JeanPaul,
Liu Ying,
StAmant Pierre
Publication year - 2004
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2004.00256.x
Subject(s) - taylor rule , output gap , monetary policy , simple (philosophy) , robustness (evolution) , inflation (cosmology) , economics , smoothing , interest rate , econometrics , function (biology) , macroeconomic model , exchange rate , small open economy , computer science , macroeconomics , central bank , philosophy , biochemistry , chemistry , physics , epistemology , evolutionary biology , biology , theoretical physics , gene , computer vision
. In this paper, we evaluate seven simple monetary policy rules in a wide range of models of the Canadian economy. Our results indicate that none of the seven simple policy rules we examined is robust to model uncertainty, in that no single rule performs well in all models. In fact, our results show that the performance of some of the simple rules, particularly rules with interest rate smoothing and rules with a high coefficient on the inflation gap, can substantially deviate from that of the optimal rule and can even be unstable in some models. Furthermore, we find that “open‐economy” rules do not perform well in many models. We find that adding an exchange rate term to a simple policy rule often increases the value of the policy‐maker's loss function. Although it is not robust, we find that a simple nominal Taylor‐type rule that has a coefficient of 2 on the inflation gap and 0.5 on the output gap outperforms the other simple rules in a certain class of models. However, even in those models, the loss‐function value of this simple rule can be substantially higher than that of the optimal or base‐case rule. JEL classification: E52, E58