A Bayesian approach to optimal monetary policy with parameter and model uncertainty
AbstractThis paper undertakes a Bayesian analysis of optimal monetary policy for the U.K. We estimate a suite of monetary-policy models that include both forward- and backward-looking representations as well as large- and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimized for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimized for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilization in forward-looking models.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 35 (2011)
Issue (Month): 12 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc
Monetary policy; Bayesian analysis; Statistical decision theory; Quantitative policy modeling;
Other versions of this item:
- Cogley, Timothy & de Paoli, Bianca & Matthes, Christian & Nikolov, Kalin & Yates, Tony, 2011. "A Bayesian approach to optimal monetary policy with parameter and model uncertainty," Bank of England working papers 414, Bank of England.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
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