Surprising Comparative Properties of Monetary Models: Results from a New Data Base
In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.
We are grateful for excellent research assistance by Tobias Cwik and Maik Wolters from Goethe University Frankfurt. Helpful comments by Frank Smets and session participants at the AEA meetings in San Francisco, January 2009, and the German Economic Association monetary committee meeting in Frankfurt are gratefully acknowledged. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
August 2012, Vol. 94, No. 3, Pages 800-816 Posted Online July 19, 2011. (doi:10.1162/REST_a_00220) © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology Surprising Comparative Properties of Monetary Models: Results from a New Model Database John B. Taylor Stanford University and Hoover Institution Volker Wieland University of Frankfurt