Comparative Analysis of Monetary Policy Rules Using Bayesian Estimation of Macroeconomic Models

Monetary policy aimed at controlling economies focuses on manipulating interest rates in an effort to manage the output, inflation price level, and activity. Our study analyzes the effects of monetary policy from 1980 to 2023 using Bayesian estimation methods across four macroeconomic models: a calibrated New-Keynesian model, Federal Reserve’s FRB model, a New Keynesian DSGE model and Smets and Wouters model. Simulation concentrates on three policy rules such as Taylor, LWW and SW, and how they affect significant variables such as real GDP, inflation and investment. Differences in the response patterns to monetary policy changes are captured by all models; however, the degree of output elasticity and the time taken by it to respond differently to a cut in interest rates is observed to be different. New-Keynesian model demonstrates a sudden and temporary rise in output, the FRB and DSGE models reveal prolonged but slow changes and the adjustment takes longer, according to the FRB model. Inflation responses that are pro-cyclical are also persistent across models and affected by the price stickiness effect. Models with financial accelerators such as the DSGE provide better insights of the relations between interest rates and borrowing costs. Lastly, sensitivity analysis also reveals that model structure and policy rule decision significantly affect the results, consistent with the notion that monetary policy should be well suited to economic environment.