Estimation of alternative monetary policy rules and their comparison

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Year of publication 2004
Type Article in Periodical
Magazine / Source Bulletin České ekonometrické společnosti
MU Faculty or unit

Faculty of Economics and Administration

Field Economy
Keywords monetary policy; forward-looking model; discretion; commitment; Taylor rule; Iterative Extended Kalman Filter Smoother; impulse responses
Description The article shows the optimal monetary policy problem in three different cases. The first is optimization under discretion. This means that a central bank can reoptimize its behaviour each period and is not history dependent. The second approach is optimization under commitment which means that a central bank makes a binding commitment and cant change its behaviour as a reaction to shocks. The last case is a simple Taylor rule which is not a result of optimization process, but demonstrates real behaviour of many central banks. The policy design problem is to characterize how the central bank should adjust the interest rate to the current state of the economy. The article shows the theoretical procedure of finding the optimal monetary policy. Further, it examines and illustrates the behaviour of the presented models on the Czech economy data. Model parameters are estimated simultaneously by the Iterative Extended Kalman Filter Smoother. Impulse responses are tested. Fundamental differences of these thre cases are explained and presented graphically. Results are economically interpreted.
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