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Guarding Against Large Policy Errors under Model Uncertainty

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  • Gino Cateau
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    Abstract

    How can policy-makers avoid large policy errors when they are uncertain about the true model of the economy? The author discusses some recent approaches that can be used for that purpose under two alternative scenarios: (i) the policy-maker has one reference model for choosing policy but cannot take a stand as to how that model is misspecified, and (ii) the policy-maker, being uncertain about the economy's true structure, entertains multiple distinct models of the economy. The author shows how these approaches can be implemented in practice using as benchmark models simplified versions of Fuhrer and Moore (1995) and Christiano, Eichenbaum, and Evans (2005).

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-13.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 06-13.

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    Length: 62 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:bca:bocawp:06-13

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    Related research

    Keywords: Uncertainty and monetary policy;

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    References

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    1. Haluk Ergin & Faruk Gul, 2003. "A Subjective Theory of Compound Lotteries," Levine's Bibliography 506439000000000406, UCLA Department of Economics.
    2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    4. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2004. "The performance and robustness of simple monetary policy rules in models of the Canadian economy," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 978-998, November.
    5. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    6. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
    7. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, April.
    8. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
    9. Alexei Onatski & Noah Williams, 2002. "Modeling model uncertainty," Discussion Papers 0203-05, Columbia University, Department of Economics.
    10. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada.
    11. Gino Cateau, 2005. "Monetary Policy under Model and Data-Parameter Uncertainty," Working Papers 05-6, Bank of Canada.
    12. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
    13. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
    14. Engert, Walter & Selody, Jack, 1998. "Uncertainty and Multiple Paradigms of the Transmission Mechanism," Working Papers 98-7, Bank of Canada.
    15. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
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    Cited by:
    1. Levine, Paul & Pearlman, Joseph, 2010. "Robust monetary rules under unstructured model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 456-471, March.
    2. Richard Dennis, 2007. "Model uncertainty and monetary policy," Working Paper Series 2007-09, Federal Reserve Bank of San Francisco.

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