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Insurance Policies for Monetary Policy in the Euro Area Author info | Abstract | Publisher info | Download info | Related research | Statistics Keith Küster () (University of Frankfurt)
Volker Wieland () (University of Frankfurt)
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In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB.We find that maximal insurance across this model range in terms of aMinimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion.These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2005/13.
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Length: 35 pages
Date of creation: 13 Jan 2005Date of revision:
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Keywords: Model uncertainty robustness monetary policy rules minimax euro area. Other versions of this item:
Paper Volker Wieland & Keith Kuester, 2005.
"Insurance Policies for Monetary Policy in the Euro Area ,"
Computing in Economics and Finance 2005
100, Society for Computational Economics.
[Downloadable!] Keith Küster & Volker Wieland, 2005.
"Insurance policies for monetary policy in the euro area ,"
Working Paper Series
480, European Central Bank.
[Downloadable!] Küster, Keith & Wieland, Volker, 2005.
"Insurance Policies for Monetary Policy in the Euro Area ,"
CEPR Discussion Papers
4956, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted) Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports :
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