Evaluating Monetary Policy Rules in Estimated Forward-Looking
Models:
A Comparison of US and German Monetary
Policies
Eric Jondeau and Hervé Le Bihan*
Annales d’Économie et de Statistique, 2002, 67/68, 361-393.
Abstract
In this paper, we estimate two small macroeconomic models for the US\ and Germany
and we compare the implied optimal monetary policy rules. We consider a model
which has been used extensively in the literature (including a Phillips curve,
an I-S curve, and a monetary policy rule) and which incorporates some forward-looking
features.\ We estimate this model over the period from 1968 to 1998, using the
full-information maximum-likelihood procedure, so that forward-looking expectations
are fully model-consistent. On the basis of stability tests, the model is shown
to have some robustness with respect to the Lucas critique. Then, we compute
optimal monetary policy rules in the class of Taylor rules with interest-rate
smoothing.\ We find that optimal policies imply a strong degree of interest-rate
smoothing. Moreover, German optimal monetary policy is found to require a more
persistent and slightly stronger response to inflation and output than the US
optimal policy. Last, we provide evidence on the robustness of the German optimal
monetary policy to parameter uncertainty.
Keywords: Forward-looking model, the Lucas critique, monetary policy rules,
optimal policy frontier.
JEL classification: E52, E58, F41.
* Banque de France, Centre de recherche