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Insurance Policies for Monetary Policy in the Euro Area

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Author Info
Keith Küster () (University of Frankfurt)
Volker Wieland () (University of Frankfurt)

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Abstract

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 2005
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Handle: RePEc:cfs:cfswop:wp200513

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Related research
Keywords: Model uncertainty; robustness; monetary policy rules; minimax; euro area.;

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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

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John B. Taylor & Volker Wieland, 2009. "Surprising Comparative Properties of Monetary Models: Results from a New Data Base," NBER Working Papers 14849, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Keith Kuester & Volker Wieland, 2008. "Insurance policies for monetary policy in the euro area," Working Papers 08-29, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-11.

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