Probing Potential Output: Monetary Policy, Credibility And Optimal Learning Under Uncertainty

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Probing Potential Output: Monetary Policy, Credibility And Optimal Learning Under Uncertainty

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James Yetman (Bank of Canada)

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James Yetman

Abstract

The effective conduct of monetary policy is hampered by uncertainty surrounding the level of potential output. Here, the case for following a more aggressive policy to learn about the economy is considered in a model where potential output is changing over time. Following such a policy may be referred to as probing or experimenting.In this model, with parameters calibrated to recent Canadian data, the optimal amount of probing is small and increases only a little with credibility. Only for unrealistically large amounts of uncertainty does the optimal policy with probing diverge significantly from a policy that ignores learning, and even then, for most forms of uncertainty, the optimal amount of probing diminishes as credibility rises.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 181.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:181

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Article
- Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 311-330, September. [Downloadable!] (restricted)
Paper
- Yetman, James, 2000. "Probing Potential Output: Monetary Policy, Credibility, and Optimal Learning under Uncertainty," Working Papers 00-10, Bank of Canada. [Downloadable!]

Cited by:
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Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Working Papers 02-10, Bank of Canada. [Downloadable!]
Doyle, Matthew, 2006. "On the Optimality of Delay in 'Monetary Policy as a Process of Search'," Staff General Research Papers 12503, Iowa State University, Department of Economics. [Downloadable!]
Tesfaselassie, Mewael F. & Schaling, Eric & Eijffinger, Sylvester, 2006. "Learning about the term structure and optimal rules for inflation targeting," Discussion Paper 88, Tilburg University, Center for Economic Research. [Downloadable!]
Other versions:
- Eijffinger, Sylvester C W & Schaling, Eric & Tesfaselassie, Mewael F., 2006. "Learning About the Term Structure and Optimal Rules for Inflation Targeting," CEPR Discussion Papers 5896, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Tesfaselassie, M.F. & Schaling, E. & Eijffinger, S.C.W., 2006. "Learning About the Term Structure and Optimal Rules for Inflation Targeting," Research Paper ERS-2006-058-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
Volker Wieland, 2006. "Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism," Advances in Macroeconomics, Berkeley Electronic Press, vol. 6(1), pages 1288-1288. [Downloadable!] (restricted)

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