Evaluating Monetary Policy Rules in Estimated Forward-Looking Models: A Comparison of US and German Monetary Policies

We estimate two small macroeconomic models with forward-looking components, for the US and Germany. The models, which include a Phillips curve, an I-S curve and a monetary policy rule, are estimated using the full-information maximum-likelihood procedure. They are shown to have some robustness with respect to the Lucas critique. Then, we compute optimal monetary policy rules in the class of dynamic Taylor rules. Optimal policies imply a strong degree of interest-rate smoothing. Moreover, German optimal policy is found to require a more persistent and slightly stronger response to inflation and output than the US optimal policy.