Simple Monetary Policymaking without the Output Gap

Abstract

Several research contributions have argued that information about the output gap is essential for a good monetary policy rule. However, as pointed out by Orphanides (2001), there is considerable real-time uncertainty about the size of the output gap. The paper argues that simple monetary policy rules that rely exclusively on (survey-based) information about future and past inflation rates may be more efficient than optimized Taylor rules once realtime output gap uncertainty is accounted for. Even when only information about historical inflation rates is available, a very simple policy rule may be constructed that improves on the Taylor rule.