Working Paper: NBER ID: w9568
Authors: Douglas Laxton; Paolo Pesenti
Abstract: This paper develops a variant of the IMF's Global Economic Model (GEM) suitable to analyze macroeconomic dynamics in open economies, and uses it to assess the effectiveness of Taylor rules and Inflation-Forecast-Based (IFB) rules in stabilizing variability in output and inflation. Our findings suggest that a simple IFB rule that does not rely upon any direct estimates of the equilibrium real interest rate and places a relatively high weight on the inflation forecast may perform better in small open economies than conventional Taylor rules.
Keywords: No keywords provided
JEL Codes: C51; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IFB rule (Y20) | inflation variability (E31) |
| IFB rule (Y20) | output variability (C67) |
| Taylor rule (E43) | inflation variability (E31) |
| Taylor rule (E43) | output variability (C67) |
| size and openness of the economy (F43) | effectiveness of monetary rules (E61) |
| external shocks (F69) | performance of monetary rules (E61) |