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Some Notes on Monetary Policy Rules with Uncertainty

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  • Gabriel Srour
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    Abstract

    The author explores the role that Taylor-type rules can play in monetary policy, given the degree of uncertainty in the economy. The optimal rule is derived from a simple infinite-horizon model of the monetary transmission mechanism, with only additive uncertainty. The author then examines how this rule ought to be modified when there is uncertainty about the parameters, the time lags, and the nature of shocks. Quantitative evaluations are subsequently provided. In particular, it is shown that if the degree of persistence of inflation in the Phillips curve is not high, a simple rule such as the original Taylor rule that offsets demand shocks and puts a relatively small weight on inflation shocks may be an appropriate benchmark for the conduct of monetary policy. Conversely, it is argued that if the degree of persistence of inflation in the Phillips curve is high, then finding a Taylor-type rule that can act as a benchmark for monetary policy is likely to be difficult.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 03-16.

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    Length: 59 pages
    Date of creation: 2003
    Date of revision:
    Handle: RePEc:bca:bocawp:03-16

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    Related research

    Keywords: Uncertainty and monetary policy;

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    References

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    1. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2002. "The Performance and Robustness of Simple Monetary Policy Rules in Models of the Canadian Economy," Technical Reports, Bank of Canada 92, Bank of Canada.
    2. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
    3. Ann-Charlotte Eliasson & Peter Isard & Douglas Laxton, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," IMF Working Papers 99/75, International Monetary Fund.
    4. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1511, C.E.P.R. Discussion Papers.
    5. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-50, Board of Governors of the Federal Reserve System (U.S.).
    6. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports, Bank of Canada 85, Bank of Canada.
    7. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics, EconWPA 9907006, EconWPA.
    8. Eric T. Swanson, 2000. "On signal extraction and non-certainty-equivalence in optimal monetary policy rules," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-32, Board of Governors of the Federal Reserve System (U.S.).
    9. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Working Papers, Bank of Canada 02-1, Bank of Canada.
    10. Brian Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-34, Board of Governors of the Federal Reserve System (U.S.).
    11. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
    12. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 1(1), pages 59-83, February.
    13. Arturo Estrella & Frederic S. Mishkin, 2000. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Working Papers 6518, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Christopher Martin & Costas Milas, 2004. "Uncertainty and UK Monetary Policy," Public Policy Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 04-11, Economics and Finance Section, School of Social Sciences, Brunel University.

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