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Assessing uncertainty in the natural rate of interest: Info‐gap as guide for monetary policy in the euro area

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  • Yakov Ben‐Haim
  • Jan Willem Van den End

Abstract

In this paper, we assume that the natural rate of interest is fundamentally uncertain. Based on a small‐scale macroeconomic model, info‐gap theory is used to rank different monetary policy strategies in terms of their robustness against this uncertainty. Applied to the euro area, we find that an inert or patient monetary strategy is more robust to natural rate uncertainty than a strategy that follows an estimated Taylor rule. An actively responsive monetary strategy is least robust. Our analysis presents a methodology that is applicable in a wide range of policy analyses under deep uncertainty.

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  • Yakov Ben‐Haim & Jan Willem Van den End, 2022. "Assessing uncertainty in the natural rate of interest: Info‐gap as guide for monetary policy in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3228-3245, July.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:3:p:3228-3245
    DOI: 10.1002/ijfe.2318
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    1. Mario Carceller del Arco & Jan Willem van den End, 2023. "Robust monetary policy under shock uncertainty," Working Papers 793, DNB.

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