The structure of this rule is simple and tractable and yet it captures the essence of the behaviour of the monetary authority. [...] To avoid the estimation problems, the choice of parameters in a Taylor-type rule typically depend less on estimated results but more on how the rule interacts with the rest of the model in a way that is consistent with the preferences of policy makers. [...] Factors such as the persistence of prices and output, the interest-rate elasticity of demand, the degree of openness, and the form of expectations influence the optimal choice of parameters. [...] We therefore include the second shock to ensure that the source of the shock would not alter the ranking of the rules. [...] The deviations of the inflation gap and the output gap from control levels work together through the monetary policy rule to raise the short-term interest rate.
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