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Monetary policy with uncertain parameters

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  • Söderström, Ulf

    ()
    (Research Department, Sveriges Riksbank)

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 is optimal for the central bank to respond more aggressively to shocks than if the parameter were known with certainty, since the central bank wants to avoid bad outcomes in the future. Uncertainty about other parameters, in contrast, acts to dampen the policy response.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 308.

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Length: 21 pages
Date of creation: 08 Mar 1999
Date of revision:
Publication status: Published in Scandinavian Journal of Economics, 2002, pages 125-145.
Handle: RePEc:hhs:hastef:0308

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Keywords: Optimal monetary policy; parameter uncertainty; Brainard conservatism principle; interest rate smoothing.;

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References

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