Please use this identifier to cite or link to this item: http://hdl.handle.net/10316/11739
Title: Taylor-type rules versus optimal policy in a Markov-switching economy
Authors: Alexandre, Fernando 
Bação, Pedro 
Gabriel, Vasco 
Keywords: Asset Prices; Monetary Policy; Markov Switching
Issue Date: 2008
Publisher: FEUC. Grupo de Estudos Monetários e Financeiros
Citation: Estudos do GEMF. 2 (2008)
Abstract: We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.
URI: http://hdl.handle.net/10316/11739
Rights: openAccess
Appears in Collections:FEUC- Vários

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