Simple monetary policy rules under model uncertainty

Using stochastic simulations and stability analysis, the paper compares how different monetary policy rules perform in a moderately nonlinear model wi th a time-varying NAIRU. Rules that perform well in linear models but impli citly embody backward-looking measures of real interest rates (such as conv entional Taylor rules) or substantial interest rate smoothing perform very poorly in models with moderate nonlinearities, particularly when policymake rs tend to make serially-correlated errors in estimating the NAIRU. This ch allenges the practice of evaluating policy rules within linear models, in w hich the consequences of responding myopically to significant overheating a re extremely unrealistic.