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Does uncertainty make a time-varying natural rate of interest irrelevant for the conduct of monetary policy?

Author

Listed:
  • Mésonnier, J-S.
  • Renne, J-P.

Abstract

We compute optimized monetary policy rules for the ECB when the euro area economy is described by a small empirical macroeconomic model with a time-varying natural interest rate which is positively correlated with fluctuations in trend output growth. We investigate the consequences of both measurement uncertainty with respect to unobservable variables and uncertainty about key model parameters. An optimized Taylor rule with time-varying neutral rate appears to perform well compared to the unconstrained optimal policy, and better than other simple rules found in the literature, even when it is penalized by taking into account both types of uncertainty.

Suggested Citation

  • Mésonnier, J-S. & Renne, J-P., 2007. "Does uncertainty make a time-varying natural rate of interest irrelevant for the conduct of monetary policy?," Working papers 175, Banque de France.
    • Handle: RePEc:bfr:banfra:175
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_175_2007.pdf
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    Cited by:

    1. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.

    More about this item

    Keywords

    Monetary policy rules ; Natural rate of interest ; Uncertainty.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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