Monetary Policy Analysis in Backward-Looking Models," Sveriges Riksbank Working Paper no

In this paper, I investigate quantitatively how sensitive a typical backward-looking model used in monetary policy analysis is to the Lucas critique. To do this, I use an equilibrium business cycle model with a Taylor-type rule rule for nomi-nal money growth. The backward-looking model displays considerable parameter instability, both from a statistical and economic point of view, when the parame-ters in the estimated monetary policy rule change. The findings suggest that the robustness of the conclusions in the literature on the relative merits of alternative monetary policy rules should be checked in an equilibrium framework