Working Paper: CEPR ID: DP7575
Authors: Patrick Minford; Zhirong Ou
Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
Keywords: bootstrap; simulation; indirect inference; monetary policy; new keynesian model; taylor-type rules
JEL Codes: E12; E17; E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taylor rule (E43) | dynamics of the US economy (N12) |
| Taylor rule with interest rate smoothing (E43) | dynamics of the US economy (N12) |
| optimal timeless rule (C41) | dynamics of the US economy (N12) |
| optimal timeless rule (C41) | Taylor rules and interest rate smoothing (E43) |