An encompassing framework for evaluating simple monetary policy rules

Pub. Date
01 October, 1999
Pub. Type

Taylor and others have argued that model stability requires interest rate policy rules have an inflation feedback parameter greater than one. In this paper we build an encompassing framework to analyse the stability conditions of various policy rules on Taylor's model and in a world where there are nominal rigidities in the short-term evolution of demand. We conclude that with a combined nominal GDP and inflation targeting rule, this stability condition is not necessary. We use stochastic simulations on NiGEM to evaluate different parameterisations of the rules. We discuss the resulting covariance structures and discuss their implications for the ECB.