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Imperfect information, real-time data and monetary policy in the euro area

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Author Info

  • Stefano Neri

    ()
    (Bank of Italy)

  • Tiziano Ropele

    ()
    (Bank of Italy)

Abstract

An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB is confronted with a more severe trade-off in the stabilization of inflation and the output gap.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td11/td802_11/en_td_802_11/en_tema_802.pdf
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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 802.

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Date of creation: Mar 2011
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Handle: RePEc:bdi:wptemi:td_802_11

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Web page: http://www.bancaditalia.it
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Keywords: monetary policy; imperfect information; real-time data;

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  1. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November.
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Cited by:
  1. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.

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