Robustness and stabilization properties of monetary policy rules in Brazil

Arbeitspapier

Based on three versions of a small macroeconomic model for Brazil, this paper presents empirical evidence on the effects of parameter uncertainty on monetary policy rules and on the robustness of optimal and simple rules over different model specifications. By comparing the optimal policy rule under parameter uncertainty with the rule calculated under purely additive uncertainty, we find that parameter uncertainty should make policymakers react less aggressively to the economy's state variables, as suggested by Brainard's "conservatism principle", although this effect seems to be relatively small. We then informally investigate each rule's robustness by analyzing the performance of policy rules derived from each model under each one of the alternative models. We find that optimal rules derived from each model perform very poorly under alternative models, whereas a simple Taylor rule is relatively robust. We also find that even within a specific model, the Taylor rule may perform better than the optimal rule under particularly unfavorable realizations from the policymaker's loss distribution function.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Texto para Discussão ; No. 798

Classification and Topics

• Classification: Wirtschaft
• Subject: Geldpolitik ; Regelbindung versus Diskretion ; Brasilien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Moreira, Ajax ; Cavalcanti, Marco Antônio Freitas de Hollanda
• Event: Veröffentlichung
• (who): Instituto de Pesquisa Econômica Aplicada (IPEA)
• (where): Brasília
• (when): 2001

Further information

• Last update: 10.03.2025, 11:42 AM CET