Working Paper: NBER ID: w15986
Authors: Marc P. Giannoni
Abstract: This paper characterizes the properties of various interest-rate rules in a basic forward-looking model. We compare simple Taylor rules and rules that respond to price-level fluctuations (called Wicksellian rules). We argue that by introducing an appropriate amount of history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare, robustness to alternative shock processes, and are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule, i.e., a monetary policy rule that implements the optimal plan and that is also completely robust to the specification of exogenous shock processes.
Keywords: Monetary Policy; Interest Rate Rules; Inflation Stabilization; Price-Level Stabilization
JEL Codes: E30; E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wicksellian interest rate rules (E43) | welfare improvement (I38) |
| Wicksellian interest rate rules (E43) | robustness to alternative shock processes (C22) |
| Wicksellian interest rate rules (E43) | effective management of private sector expectations (E69) |
| Wicksellian interest rate rules (E43) | reduced variability of inflation and output (E31) |
| price-level stabilization (E31) | lower inflation trajectory (E31) |
| lower inflation trajectory (E31) | mitigated initial inflation spike (E31) |
| mitigated initial inflation spike (E31) | lower welfare losses (D69) |
| Wicksellian rules (E43) | determinate equilibrium (D50) |
| optimal Taylor rules (E43) | indeterminate equilibria (D59) |
| Wicksellian rule with interest rate inertia (E43) | robustly optimal monetary policy rule (E61) |