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Monetary Policy Under Uncertainty and Learning: An Overview

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  • Klaus Schmidt-Hebbel D.
  • Carl E. Walsh.

Abstract

Central banks must make policy decisions in the face of uncertainty based on imperfect and evolving knowledge about the economy. While few general results have emerged from the research on monetary policy in the face of uncertainty and learning, a key lesson is that neither uncertainty nor learning can be ignored. This paper selectively reviews the literature on uncertainty and learning, specifically on the insights that are important for the conduct of monetary policy. Then it surveys the new research presented at the latest annual conference of the Central Bank of Chile, which uncovered recent theoretical results and empirical evidence for developed countries and the Chilean economy.

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 11 (2008)
Issue (Month): 3 (December)
Pages: 5-19

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Handle: RePEc:chb:bcchec:v:11:y:2008:i:3:p:5-19

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References

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  1. anonymous, 2008. "Monetary policy report to the Congress," Web Site 34, Board of Governors of the Federal Reserve System (U.S.).
  2. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1135-1149, September.
  3. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," Working Paper Series 203, Sveriges Riksbank (Central Bank of Sweden).
  4. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
  5. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  6. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.).
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  8. Söderström, Ulf, 2000. "Monetary policy with uncertain parameters," Working Paper Series 0013, European Central Bank.
  9. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  10. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  11. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
  12. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  13. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  14. Walsh, Carl E., 2004. "Implications of a Changing Economic Structure for the Strategy of Monetary Policy," Santa Cruz Department of Economics, Working Paper Series qt84g1q1g6, Department of Economics, UC Santa Cruz.
  15. Andrew T. Levin & John C. Williams, 2003. "Robust monetary policy with competing reference models," Working Paper Series 2003-10, Federal Reserve Bank of San Francisco.
  16. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  17. Christina D. Romer & David H. Romer, 2002. "The evolution of economic understanding and postwar stabilization policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-78.
  18. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
  19. Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2005. "Benefits from U.S. monetary policy experimentation in the days of Samuelson and Solow and Lucas," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  20. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
  21. Garnier, Julien & Wilhelmsen, Bjørn-Roger, 2005. "The natural real interest rate and the output gap in the euro area: a joint estimation," Working Paper Series 0546, European Central Bank.
  22. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  23. anonymous, 2008. "Monetary policy report to the Congress," Web Site 16, Board of Governors of the Federal Reserve System (U.S.).
  24. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc.
  25. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  26. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 581-604, April.
  27. Klaus Schmidt-Hebbel & Carl E. Walsh, 2009. "Monetary Policy under Uncertainty and Learning: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 1, pages 001-025 Central Bank of Chile.
  28. Gaspar, Vitor & Smets, Frank, 2002. "Monetary Policy, Price Stability and Output Gap Stabilization," International Finance, Wiley Blackwell, vol. 5(2), pages 193-211, Summer.
  29. Paul Jenkins & David Longworth, 2002. "Monetary Policy and Uncertainty," Bank of Canada Review, Bank of Canada, vol. 2002(Summer), pages 3-10.
  30. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  31. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," NBER Working Papers 9419, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Kaushik Mitra & George W. Evans & Seppo Honkapohja, 2011. "Policy Change and Learning in the RBC Model," CDMA Working Paper Series 201111, Centre for Dynamic Macroeconomic Analysis.
  2. Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.
  3. Klaus Schmidt-Hebbel D. & Carl E. Walsh., 2008. "Monetary Policy Under Uncertainty and Learning: An Overview," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 5-19, December.
  4. Orlando Gomes, 2012. "Endogenous Heterogeneity, the Propagation of Information and Macroeconomic Complexity," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 6(1), pages 38-58, March.
  5. Klaus Schmidt-Hebbel., 2009. "Inflation Targeting Twenty Years on: Where, When, Why, With what Effects, What lies ahead?," Documentos de Trabajo 360, Instituto de Economia. Pontificia Universidad Católica de Chile..

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