BibTeX
@MISC{Williams03simplerules,
author = {John C. Williams},
title = { Simple Rules for Monetary Policy },
year = {2003}
}
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Abstract
How effective are “simple” monetary policy rules at stabilizing the economy? This paper explores the characteristics and performance of monetary policy rules designed to minimize fluctuations in inflation, output, and interest rates using the Federal Reserve Board’s large-scale FRB/US macroeconometric model. I find that a smoothed measure of inflation, the output gap, and the lagged funds rate are sufficient statistics for the setting of monetary policy. Efficient simple rules that respond to these three variables perform nearly as well as fully optimal policies that respond to the hundreds of variables in the model, and the simple rules are more robust to model misspecification. Efficient policies smooth the interest rate response to shocks and use the feedback from anticipated policy actions to stabilize inflation and output and to moderate movements in short-term interest rates. These results hold in a wide range of macro models but are sensitive to the assumption of rational expectations.
Keyphrases
monetary policy simple rule efficient policy monetary policy rule federal reserve board anticipated policy action simple monetary policy rule interest rate sufficient statistic lagged fund rate optimal policy smoothed measure large-scale frb u macroeconometric model wide range interest rate response efficient simple rule rational expectation short-term interest rate output gap macro model
