Evaluating Monetary Policy Rules in Estimated Forward-Looking Models: A Comparison of US and German Monetary Policies

40 Pages Posted: 27 Dec 2010

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Hervé le Bihan

Banque de France - Centre de Recherche

Date Written: October 2000

Abstract

In this paper, we estimate two small, forward-looking, macroeconomic models for the US and Germany and we compare the implied optimal monetary policy rules. Both models have a standard structure: an I-S curve, a Phillips curve, a short term interest-rate rule and a long term interest rate determined by the Expectations Hypothesis. They are intended to fit the data while allowing for some forward-looking behavior. They are estimated from 1968 to 1998, using the full-information maximum-likelihood procedure, so that forward-looking expectations are fully model-consistent. In order to evaluate monetary policy, we compute optimal policy frontiers and we perform some simulations of the model. German optimal monetary policy is found to require a more persistent and slightly stronger response to inflation and output than the US optimal policy.

Keywords: Forward-looking model, monetary policy rules

JEL Classification: E52, E58, F41

Suggested Citation

Jondeau, Eric and Le Bihan, Herve, Evaluating Monetary Policy Rules in Estimated Forward-Looking Models: A Comparison of US and German Monetary Policies (October 2000). Banque de France Working Paper No. 76. Available at SSRN: https://ssrn.com/abstract=1730592 or http://dx.doi.org/10.2139/ssrn.1730592

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
75049 Paris Cedex 01
France

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