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Inflation, Price Level and Hybrid Rules under Inflation Uncertainty
Author(s) -
Jääskelä Jarkko P.
Publication year - 2005
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2005.00399.x
Subject(s) - economics , inflation (cosmology) , new keynesian economics , robustness (evolution) , output gap , econometrics , phillips curve , price setting , price level , persistence (discontinuity) , real interest rate , monetary policy , keynesian economics , microeconomics , biochemistry , chemistry , physics , geotechnical engineering , theoretical physics , engineering , gene
The performance and robustness of optimised interest rate rules are analysed in a New Keynesian model estimated for the euro area economy. In particular, we examine the properties of rules responding to inflation, the price level, or a combination of the two (a hybrid rule). All the rules also respond to the output gap. The optimal hybrid rule is only marginally superior when there is no model uncertainty. When there is uncertainty about the degree of inflation persistence, the inflation rule is the most robust rule and the performance of the other two rules deteriorates. However, all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers’ estimate.