Monetary Rule, Central Bank Loss and Household's Welfare: An Empirical Investigation
28 Pages Posted: 15 Nov 2017
There are 3 versions of this paper
Central Bank Losses and Monetary Policy Rules: A DSGE Investigation
Nominal Income Versus Taylor-Type Rules in Practice
Date Written: 2017-10-01
Abstract
Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank’s objectives? Is minimizing a central bank loss equivalent to maximizing households’ welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same.
JEL Classification: E32, E52, E58
Suggested Citation: Suggested Citation