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New Economy - New Policy Rules?

Bullard,J.
; 
Schaling,E.
Abstract
The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies. Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity. We augment this model with regime switching in productivity, and calculate the optimal monetary policy rule in the altered environment. We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule. We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model.
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Pagination: 20
Date
2000
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Volume Title
Publisher
Vakgroep CentER
Collections
Tilburg University Research Output Collection
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Keywords
inflation targets, strutural change, monetary policy rules, new economy, regime switching, C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models, E47 - Forecasting and Simulation: Models and Applications, E52 - Monetary Policy, E58 - Central Banks and Their Policies, SDG 17 - Partnerships for the Goals
Citation
Bullard, J & Schaling, E 2000 'New Economy - New Policy Rules?' CentER Discussion Paper, vol. 2000-72, Vakgroep CentER, Tilburg.
URI
https://hdl.handle.net/20.500.14602/26699
License
info:eu-repo/semantics/restrictedAccess
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