International Evidence on the Stability of the Optimizing is Equation

We provide international evidence on the issue of whether the optimizing IS equation is more stable than a backward-looking alternative. This evidence consists of estimates of IS equations on quarterly data for the UK and Australia, both for the full sample of the last 40 years and for the period following major monetary policy shifts in 1979-80. Results suggest the parameters in the optimizing IS equations are more empirically stable than those of the backward-looking alternative. The use of dynamic general equilibrium modelling in empirical work does deliver material benefits, in the form of equations more suitable for policy analysis