Taylor rule cross-checking and selective monetary policy adjustment

The Taylor rule is a widely used concept in monetary macroeconomics and has been used in various areas either for positive or normative analyses. We examine whether the robustifying nature of Taylor rule cross-checking in the spirit of R island and Sveen (2011) also carries over to the case of parameter uncertainty. We find that adjusting monetary policy based on this kind of cross-checking can on average improve the outcome for the monetary authority in selected specifications. This, however, strongly depends on the functional form and also on the degree of the parameter misspecification as well as the information set of the monetary authority. In those specifications, increasing the relative weight attached to Taylor rule cross-checking results in a trade-off as higher average gains in terms of a reduction of loss are accompanied by higher standard deviations of the relative losses.