The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area

by Ramón Adalid, Günter Coenen, Peter McAdam (European Central Bank) and Stefano Siviero (Banca d'Italia)

Abstract

In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.

JEL Codes: E31, E52, E58, E61

 
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