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Optimal interest rate rules and inflation stabilization versus price-level stabilization

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  • Marc Giannoni
Abstract
This paper compares the properties of interest rate rules such as simple Taylor rules and rules that respond to price-level fluctuations?called Wicksellian rules?in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare and robustness to alternative shock processes, and they are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule?that is, a monetary policy rule that implements the optimal plan and is also completely robust to the specification of exogenous shock processes.

Suggested Citation

  • Marc Giannoni, 2012. "Optimal interest rate rules and inflation stabilization versus price-level stabilization," Staff Reports 546, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:546
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    More about this item

    Keywords

    Taylor's rule; Inflation (Finance); Monetary policy; Price levels; Interest rates;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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