ARE APPRECIATED . Simple Rules in the M 1 - VECM

This paper analyses various simple interest rate rules using a vector error correction forecasting model of the Canadian economy that is anchored by long-run equilibrium relationships suggested by economic theory. Dynamic and stochastic simulations are performed using several interest rate rules, including money based rules and their properties are analysed. Among the class of rules we consider in this model, we find that a simple rule with interest rate smoothing minimizes the volatility of output, inflation and interest rate. This rule dominates Taylor-type, Ball and other simple rules. *FR-01-002.We would like to thank Scott Hendry, Dinah Maclean, Pierre St-Amant for helpful suggestions and discussions. Thank you also to Sharon Kozicki our discussant at the CEA 2001 meetings in Montreal, Chris Graham for providing technical help, Jim Day for providing help with the graphs and participants at the brown bag meeting. The views in this paper are those of the authors and should not be attributed to the Bank of Canada. All errors and omissions are of our own.