Nominal Income Versus Taylor-Type Rules in Practice
ESSEC WORKING PAPER 1610
39 Pages Posted: 31 Aug 2016
Date Written: July 4, 2016
Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Feds loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central banks objectives are not consistently met by a single rule for all periods.
Keywords: Monetary policy, NGDP targeting, Taylor rule, DSGE model
JEL Classification: E52, E58, E32
Suggested Citation: Suggested Citation