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Monetary Policy with Uncertain Parameters

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  • Soderstrom, Ulf

Abstract

This paper shows that--in contrast to the received wisdom--uncertainty about the parameters in a dynamic macroeconomic model may lead to more aggressive monetary policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond to shocks more aggressively in order to reduce uncertainty about the future development of inflation. Uncertainty about other parameters, on the other hand, dampens the policy response. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 104 (2002)
Issue (Month): 1 ()
Pages: 125-45

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Handle: RePEc:bla:scandj:v:104:y:2002:i:1:p:125-45

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References

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  1. Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
  2. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  3. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers 98-5, Federal Reserve Bank of Boston.
  4. Volker Wieland, . "Monetary Policy and Uncertainty about the Natural Unemployment Rate," Computing in Economics and Finance 1997 11, Society for Computational Economics.
  5. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York.
  6. Basar, Tamer & Salmon, Mark, 1987. "Credibility and the Value of Information Transmission in a Model of Monetary Policy and Inflation," The Warwick Economics Research Paper Series (TWERPS) 289, University of Warwick, Department of Economics.
  7. Ellingsen, Tore & Söderström, Ulf, 1998. "Monetary Policy and Market Interest Rates," Working Paper Series in Economics and Finance 242, Stockholm School of Economics, revised 08 Mar 1999.
  8. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-61, September.
  9. Christina D. Romer, 1996. "Inflation and the Growth Rate of Output," NBER Working Papers 5575, National Bureau of Economic Research, Inc.
  10. Charles Goodhart, 1998. "Central Bankers and Uncertainty," FMG Special Papers sp106, Financial Markets Group.
  11. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (U.S.).
  12. Balvers, Ronald J & Cosimano, Thomas F, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 721-38, October.
  13. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
  14. William Poole, 1998. "A policymaker confronts uncertainty," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-8.
  15. Geoffrey Shuetrim & Christopher Thompson, 1999. "The Implications of Uncertainty for Monetary Policy," RBA Research Discussion Papers rdp1999-10, Reserve Bank of Australia.
  16. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-34.
  17. Jeffrey C. Fuhrer, 1994. "Optimal monetary policy and the sacrifice ratio," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 43-84.
  18. Onatski, Alexei & Stock, James H., 2002. "Robust Monetary Policy Under Model Uncertainty In A Small Model Of The U.S. Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 85-110, February.
  19. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  20. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
  21. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  22. Bertocchi, Graziella & Spagat, Michael, 1991. "Learning, Experimentation and Monetary Policy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1991018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  23. William Poole, 1998. "A policymaker confronts uncertainty," Speech 88, Federal Reserve Bank of St. Louis.
  24. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada.
  25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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