Recursive Thick Modeling and the Choice of Monetary Policy in Mexico

38 Pages Posted: 2 Oct 2006  

Arnulfo Rodriguez

Independent Scholar

Pedro N. Rodriguez

Complutense University of Madrid - Facultad de Ciencias Económicas y Empresariales - Departamento de Estadística e Investigación Operativa II

Date Written: October 2006

Abstract

The choice of monetary policy is the most important concern of central banks, but this choice is always confronted with two relevant aspects of economic policy: parameter instability and model uncertainty. This paper deals with both types of uncertainty and shows that recursive thick modeling is a better approximation to the recent historical nominal interest rates in Mexico than both recursive thin modeling and models with a low penalty on interest rate variability. We complement previous work by evaluating the usefulness of both recursive thick modeling and recursive thin modeling in terms of direction-of-change forecastability. The results show a policy maker who cares about inflation and output stabilization the same for downward movements in nominal interest rates. Furthermore, our results suggest a policy maker with a higher preference for inflation stabilization for upward movements in nominal interest rates.

Keywords: macroeconomic policy, model uncertainty, optimal control, monetary policy

JEL Classification: C61, E61

Suggested Citation

Rodriguez, Arnulfo and Rodriguez, Pedro N., Recursive Thick Modeling and the Choice of Monetary Policy in Mexico (October 2006). Available at SSRN: https://ssrn.com/abstract=933729 or http://dx.doi.org/10.2139/ssrn.933729

Arnulfo Rodriguez (Contact Author)

Independent Scholar ( email )

Mexico City, DF 06100
Mexico

Pedro N. Rodriguez

Complutense University of Madrid - Facultad de Ciencias Económicas y Empresariales - Departamento de Estadística e Investigación Operativa II ( email )

Carretera de Humera s/n
Madrid 28223, Madrid 28223
Spain

HOME PAGE: http://www.pnrodriguez.com

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