Robust Monetary Policy Rules with Unknown Natural Rates

  title={Robust Monetary Policy Rules with Unknown Natural Rates},
  author={Athanasios Orphanides},
We examine the performance and robustness properties of alternative monetary policy rules in the presence of structural change that renders the natural rates of interest and unemployment uncertain. Using a forward-looking quarterly model of the U.S. economy, estimated over the 1969-2002 period, we show that the cost of underestimating the extent of misperceptions regarding the natural rates significantly exceeds the costs of overestimating such errors. Naive adoption of policy rules optimized… CONTINUE READING