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Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom

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  • Simon Hall
  • Chris Salmon
  • Tony Yates
  • Nicoletta Batini

Abstract

This paper reports an investigation of the effects of additive and multiplicative uncertainty upon the stabilisation properties of a simple base money rule for monetary policy. Using a five-equation empirical model of the United Kingdom, it is shown that changes in the extent of additive uncertainty have no effect on the 'optimal' degree of policy responsiveness to shocks to the economy. However, it is found that policy-makers should respond by less to shocks in the face of multiplicative uncertainty, and, as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard's (1967) theoretical analysis and could be interpreted as justifying a gradualist monetary policy.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1999/wp96.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 96.

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Date of creation: Jun 1999
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Handle: RePEc:boe:boeewp:96

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Cited by:
  1. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
  2. Marco Antonio Bonomo & Ricardo D. Brito, 2001. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Working Papers Series 28, Central Bank of Brazil, Research Department.
  3. Kimura, Takeshi & Kurozumi, Takushi, 2007. "Optimal monetary policy in a micro-founded model with parameter uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 399-431, February.
  4. Lavan Mahadeva & Gabriel Sterne, 2002. "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England.
  5. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.
  6. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
  7. Robert J. Tetlow & Peter von zur Muehlen, 2002. "Avoiding Nash inflation: Bayesian and robust responses to model uncertainty," Finance and Economics Discussion Series 2002-9, Board of Governors of the Federal Reserve System (U.S.).
  8. Katerina Smidkova, 2003. "Targeting Inflation under Uncertainty: Policy Makers’ Perspective," Macroeconomics 0304003, EconWPA.
  9. Marc Giannoni, 2006. "Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty," NBER Working Papers 11942, National Bureau of Economic Research, Inc.
  10. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.
  11. Marc P. Giannoni, 2007. "Robust optimal monetary policy in a forward-looking model with parameter and shock uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 179-213.
  12. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, EconWPA.

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