We explore Knightian model uncertainty as an explanation for the observed excess persistence and attenuation in estimated interest-rate reaction functions for the United States, relative to what optimal feedback rules would suggest. Two types of uncertainty are identified: (i) unstructured model...

In his 1999 monograph The Conquest of American Inflation Tom Sargent describes how a policymaker, who applies a constant-gain algorithm in estimating the Phillips curve, can fall into the grip of an induction problem: concluding on the basis of reduced-form evidence that the trade-off between...

This paper explores Knightian model uncertainty as a possible explanation of the considerable difference between estimated interest rate rules and optimal feedback descriptions of monetary policy. We focus on two types of uncertainty: (i) unstructured model uncertainty reflected in additive...

The monetary policy rules that are widely discussed--notably the Taylor rule--are remarkable for their simplicity. One reason for the apparant preference for simple ad hoc rules over optimal rules might be the assumption of full information maintained in the computation of an optimal rule....

In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and...

The normal assumption of full information is dropped and the choice of monetary policy rules is instead examined when private agents must learn the rule. A small, forward-looking model is estimated and stochastic simulations conducted with agents using discounted least squares to learn of a...

This paper examines the friction between simplicity and optimality in the design of monetary policy rules. With complete information, rational expectations, and full optimization, the correct answer to the question of the best rule is trite: optimal control is optimal. However, rational...

This is a technical appendix to a group of papers being prepared, one of which is "Monetary Policy Rules in a Small Forward-Looking Macro Model." The present paper, the first of several, attempts to quantify the relative advantage of simple, Taylor-style interest rate rules vs. feedback rules...