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The Effect of Uncertainty on Monetary Policy: How Good are the Brakes? Author info | Abstract | Publisher info | Download info | Related research | Statistics Guy Debelle (Reserve Bank of Australia)
Adam Cagliarini (Reserve Bank of Australia)
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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 Reserve Bank of Australia in its series RBA Research Discussion Papers with number
rdp2000-07.
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Date of creation: Oct 2000Date of revision:
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Keywords: interest rate smoothing monetary policy parameter uncertainty Other versions of this item:
Find related papers by JEL classification: E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation 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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