Abstract
We compare three standard New Keynesian models differing only in their representations of monetary policy—the Optimal Timeless Rule, the original Taylor Rule and another with ‘interest rate smoothing’—with the aim of testing which if any can match the data according to the method of indirect inference. We find that the Optimal Timeless Rule performs the best, either with calibrated parameters or with estimated parameters. This model can also account for the widespread finding of apparent ‘Taylor Rules’ and smoothed interest rates in the data, even though neither of these represents the true policy.
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