Evaluating Interest Rate Rules in an Estimated DSGE Model - Federal Reserve Bank of New York

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Evaluating Interest Rate Rules in an Estimated DSGE Model

2014 August 2011 Number 510

JEL classification: E48, E58, C11

Authors: Vasco Cúrdia, Andrea Ferrero, Ging Cee Ng, and Andrea Tambalotti

The empirical DSGE (dynamic stochastic general equilibrium) literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound, but their relative merit is rarely discussed. We contribute to filling this gap by comparing the fit of a large set of interest rate rules (fifty-five in total), which we estimate within a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level—the one that would prevail in the absence of distortions—have the worst fit within the set we consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best-fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.

Available only in PDF pdf

47 pages / 410 kb

For a published version of this report, see Vasco Cúrdia, Andrea Ferrero, Ging Cee Ng, and Andrea Tambalotti, "Evaluating Interest Rate Rules in an Estimated DSGE Model," Journal of Monetary Economics 70
(March 2015): 72-83.

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