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Abstract

In practice, monetary policy changes tend to produce a smooth path for interest rates while the path of policy interest rates generated by models is often considerably more variable. This paper investigates whether the inclusion of uncertainty can help reconcile the theory to the practice. It shows that parameter uncertainty does not induce much smoothness when its effects are directly incorporated into a model. Uncertainty about the interest sensitivity of output can increase the smoothness of optimal policy in a model, but the path of policy interest rates generated is still considerably more variable than that observed in practice.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 74.

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Date of creation: Jun 2000
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Handle: RePEc:chb:bcchwp:74

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Find related papers by JEL classification:

• E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
• 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

This paper has been announced in the following NEP Reports:

• NEP-ALL-2004-02-10 (All new papers)
• NEP-CBA-2002-02-15 (Central Banking)
• NEP-MON-2002-02-15 (Monetary Economics)
• NEP-PKE-2002-02-15 (Post Keynesian Economics)

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