Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71149
Authors: 
Orphanides, Athanasios
Wieland, Volker
Year of Publication: 
2012
Series/Report no.: 
CFS Working Paper 2012/11
Abstract: 
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
Subjects: 
Financial Crisis
Complexity
Monetary Policy
Model Uncertainty
Robust Simple Rules
ECB
JEL: 
E50
E52
E58
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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