Abstract

This paper examines various interest rate rules, as well as policies derived by solving optimal control problems, for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. A multicountry econometric model is used for the experiments. The results differ sharply from those obtained using recent models in which the coeffi- cient on inflation in the nominal interest rate rule must be greater than one in order for the economy to be stable.

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