The Implications of Uncertainty for Monetary Policy
AbstractThis paper uses a simple model of the Australian economy to empirically examine the consequences of parameter uncertainty for optimal monetary policy. Optimal policy responses are derived for a monetary authority that targets inflation and output stability. Parameter uncertainty is characterised by the estimated distribution of the model coefficient estimates. Learning is ruled out, so the monetary authority can commit to its ex ante policy response. For certain shocks, taking account of parameter uncertainty can recommend more, rather than less, activist use of the policy instrument. While this finding is specific to the model specification, parameter estimates and the shocks analysed, it contrasts with the widely held belief that the generic implication of parameter uncertainty is more conservative policy. Copyright 2003. The Economic Society of Australia.
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Bibliographic InfoArticle provided by The Economic Society of Australia in its journal The Economic Record.
Volume (Year): 79 (2003)
Issue (Month): 246 (09)
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Other versions of this item:
- Geoffrey Shuetrim & Christopher Thompson, 1999. "The Implications of Uncertainty for Monetary Policy," RBA Research Discussion Papers rdp1999-10, Reserve Bank of Australia.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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