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Monetary policy with uncertain parameters

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  • Söderström, Ulf

Abstract

In a simple dynamic macroeconomic model, it is shown that uncertainty about structural parameters does not necessarily lead to more cautious monetary policy, refining the accepted wisdom concerning the effects of parameter uncertainty on optimal policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond more aggressively to shocks than under certainty equivalence, since the central bank this way reduces uncertainty about the future development of inflation. Uncertainty about other parameters, in contrast, acts to dampen the policy response. JEL Classification: E43, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0013.

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Date of creation: Feb 2000
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Handle: RePEc:ecb:ecbwps:20000013

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