Monetary Policy Rules Evaluation Using a Forward Looking Model for Romania

Abstract

The starting point of this paper was a small structural model, the next step was to estimate the parameters and then to evaluate the performance of alternative rules treating structural parameters as fixed and known. Performance evaluation was done through a policy loss function with three inputs. The first input is a set of three weights representing the relative importance of the central bank to stabilize inflation, output and interest rates. The first conclusion is that the rules that recorded the lowers values on loss function are the Optimal Taylor with interest rate smoothing (T) and Full state rule (FS). The latter rule is best when the weight on output gap is smaller than 0.25.
Keywords: Inflation targeting, Interest rate policy, Optimal monetary policy, Taylor’s rule