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Some Notes on Monetary Policy Rules with Uncertainty

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Author Info
Gabriel Srour
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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File URL: http://www.bankofcanada.ca/en/res/wp/2003/wp03-16.pdf
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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;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Working Papers 02-1, Bank of Canada. [Downloadable!]
  2. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series 1998-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA. [Downloadable!]
    Other versions:
  5. Brian Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  7. Eric T. Swanson, 2000. "On signal extraction and non-certainty-equivalence in optimal monetary policy rules," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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  8. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February. [Downloadable!] (restricted)
  9. 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.). [Downloadable!]
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  10. 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 92, Bank of Canada. [Downloadable!]
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  11. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada. [Downloadable!]
  12. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christopher Martin & Costas Milas, 2005. "Uncertainty and Monetary Policy Rules in the United States," Keele Economics Research Papers KERP 2005/10, Centre for Economic Research, Keele University. [Downloadable!]
    Other versions:
  2. Christopher Martin & Costas Milas, 2006. "The Impact of Uncertainty on Monetary Policy Rules in the UK," Keele Economics Research Papers KERP 2006/09, Centre for Economic Research, Keele University. [Downloadable!]
  3. Christopher Martin & Costas Milas, 2004. "Uncertainty and UK Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2004 65, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
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