Optimal Monetary Policy under Risk and Uncertainty
AbstractThis paper seeks to characterise optimal monetary policy rules in the presence of risk and uncertainty. I explore a situation in which the true parameters and the true structure of the economy are unknown to the policymaker, and he is reluctant to make a decision based on a single distribution estimate (i.e. he faces Knightian uncertainty). I show analytically that if the policymaker does not know the true structure of the economy he will be more cautious than in the case of only parameter risk. Further, I show that Knightian uncertainty can also lead to an extra precautionary motive when one considers its interaction with parameter risk. In a simple exercise, I provide empirical estimates that demonstrate that adjustments due to parameter and structural risk and Knightian uncertainty can potentially be quite large.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Economic Issues in its journal Economic Issues.
Volume (Year): 12 (2007)
Issue (Month): 1 (March)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Philip Arestis & Alexander Mihailov, 2007.
"Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy,"
Economic Analysis Research Group Working Papers
earg-wp2007-13, Henley Business School, Reading University.
- P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
- Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economics & Management Discussion Papers em-dp2007-53, Henley Business School, Reading University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dan Wheatley).
If references are entirely missing, you can add them using this form.