The Implications of Uncertainty for Monetary Policy
AbstractIn this paper we use a simple model of the Australian economy to empirically examine the consequences of parameter uncertainty for optimal monetary policy. Optimal policy responses are derived for a monetary authority that targets inflation and output stability. Parameter uncertainty is characterised by the estimated distribution of the model coefficient estimates. Learning is ruled out, so the monetary authority can commit to its ex ante policy response. We find that taking account of parameter uncertainty can recommend more, rather than less, activist use of the policy instrument. While we acknowledge that this finding is specific to the model specification, parameter estimates and the shocks analysed, the result does stand in contrast to the widely held belief that the generic implication of parameter uncertainty is more conservative policy.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp1999-10.
Date of creation: Nov 1999
Date of revision:
Other versions of this item:
- Geoffrey Shuetrim & Christopher Thompson, 2003. "The Implications of Uncertainty for Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 79(246), pages 370-379, 09.
- 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
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