Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: Recent research have provided evidence that backward-looking models fit the data well while purely forward-looking models seem to be inconsistent with data. Consequently, many recent papers in the monetary policy rule literature have used "hybrid" models, which contain both backward- and forward-looking components. In this paper, I demonstrate that a dynamic general equilibrium model with flexible prices and forward-looking properties cannot account for the empirical findings, i.e. that backward-looking behavior seems more important than forward-looking behavior, and that backward-looking models fit the data better than purely forward-looking models. The results also show that the equilibrium model cannot replicate the estimated high weight on backward-looking behavior on US data for the hybrid model.

Keywords: Monetary policy rules; New Keynesian Phillips-curves; Rational expectations IS-curves; Backward-looking models; Dynamic general equilibrium models; Lucas critique

JEL-codes: C22; C52; E52

30 pages, December 1, 2001

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