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Risk Management in Action. Robust monetary policy rules under structured uncertainty Author info | Abstract | Publisher info | Download info | Related research | Statistics Paul Levine () (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K. )
Peter McAdam () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany. )
Joseph Pearlman () (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, U.K. )
Richard Pierse () (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K. )
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Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary-policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policymaker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast-based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58.
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Paper provided by European Central Bank in its series Working Paper Series with number
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Length: 62 pages
Date of creation: Feb 2008Date of revision:
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Keywords: Interest-rate rules robustness structured uncertainty. Other versions of this item:
This paper has been announced in the following NEP Reports :
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