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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2005.08.010 Byline: Nicoletta Batini (a), Alejandro Justiniano (a), Paul Levine (b), Joseph Pearlman (c) Abstract: This paper provides a first attempt to quantify and at the same time utilize estimated measures of uncertainty for the design of robust interest rate rules. We estimate several variants of a linearized form of a New Keynesian model using quarterly US data. Both our theoretical and numerical results indicate that inflation-forecast-based (IFB) rules are increasingly prone to the problem of indeterminacy as the forward horizon increases. As a consequence the stabilization performance of optimized rules of this type worsens too. Robust IFB rules can be designed to avoid indeterminacy in an uncertain environment, but at an increasing utility loss as rules become more forward-looking. Author Affiliation: (a) Board of Governors of the Federal Reserve, USA (b) Department of Economics, University of Surrey, Guildford GU2 7SX, UK (c) London Metropolitan University, UK Article History: Received 27 September 2004; Accepted 11 August 2005 Article Note: (footnote) [star] This is a revised version of a paper presented at the 10th International Conference on Computing in Economics and Finance, Amsterdam, July 8-10, 2004. The authors are grateful for comments from participants. The paper also benefited from the constructive reviews of three anonymous referees and one of the editors of this volume. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, nor those of the IMF.

The employment adjustment costs and the openness of United Kingdom are captured by using new Keynesian Philips curve (NKPC).

An inflation-based forecasting rule serves to offer guidance for economic policy setting in small open economies.

The article suggests a new monetary conditions index for the United Kingdom that would be more accurate than the international ones that are available.

This is an analysis of inflation targeting being designed so the target is achieved over the medium term. When the economy adjusts sluggishly to economic shocks, central banks should neutralize inflationary shocks gradually.

This article builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007–2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the 'only game in town' after 2013. Individual countries' DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance. [ABSTRACT FROM AUTHOR]

The alternative measures of the short-run or effective NAIRU (SRN) are derived for the United Kingdom. The deviations of unemployment from the short-run NAIRU measures prove helpful in describing Retail Prices excluding mortgage interest payments (RPIX) and Personal Consumption Expenditure (PCE) inflation and also demonstrate their usefulness in constructing Taylor-type policy rules for the interest rate.

This paper investigates the role played by total factor productivity (TFP) in the tradable and nontradable sectors of the United States, the euro area, and Japan in the emergence and evolution of today's global trade imbalances. Simulation results based on a dynamic general equilibrium model of the world economy, and using the new EU KLEMS database, indicate that TFP developments in these economies can account for a significant fraction of the deterioration in the U.S. trade balance since 1998, as well as for some of the surpluses in the euro area and Japan. Differences in TFP developments across sectors can also partially explain the evolution of the real effective value of the U.S. dollar during this period. These results highlight the importance of focusing on productivity developments in the nontradable sector of these large, relatively closed economies to understand the evolution of their trade balance and real exchange rate.IMF Staff Papers (2008) 55, 312–325. doi:10.1057/imfsp.2008.5; published online 22 April 2008 [ABSTRACT FROM AUTHOR]

This paper updates and extends Friedman's (1972) evidence on the lag between monetary policy actions and the response of inflation. Our evidence is based on UK and US data for the period 1953-2001 on money growth rates, inflation and interest rates, as well as annual data on money growth and inflation. We reaffirm Friedman's result that it takes over a year before monetary policy actions have their peak effect on inflation. This result has persisted despite numerous changes in monetary policy arrangements in both countries. Similarly, advances in information processing and in financial market sophistication do not appear to have substantially shortened the lag. The empirical evaluation of dynamic general equilibrium models needs to be extended to include an assessment of these models' ability to account for the monetary transmission lags found in the data. [ABSTRACT FROM AUTHOR]