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Monetary Policy with Uncertain Parameters

  • Soderstrom, Ulf

This paper shows that--in contrast to the received wisdom--uncertainty about the parameters in a dynamic macroeconomic model may lead to more aggressive monetary policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond to shocks more aggressively in order to reduce uncertainty about the future development of inflation. Uncertainty about other parameters, on the other hand, dampens the policy response. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 104 (2002)
Issue (Month): 1 ()
Pages: 125-45

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Handle: RePEc:bla:scandj:v:104:y:2002:i:1:p:125-45
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  1. Bertocchi, Graziella & Spagat, Michael, 1993. "Learning, experimentation, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 169-183, August.
  2. Wieland, Volker, 2003. "Monetary Policy and Uncertainty about the Natural Unemployment Rate," CFS Working Paper Series 2003/05, Center for Financial Studies (CFS).
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  7. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc.
  8. Geoffrey Shuetrim & Christopher Thompson, 1999. "The Implications of Uncertainty for Monetary Policy," RBA Research Discussion Papers rdp1999-10, Reserve Bank of Australia.
  9. Jeffrey C. Fuhrer, 1994. "Optimal monetary policy and the sacrifice ratio," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 43-84.
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  12. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada.
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  18. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers 98-5, Federal Reserve Bank of Boston.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. William Poole, 1998. "A policymaker confronts uncertainty," Speech 88, Federal Reserve Bank of St. Louis.
  21. Tore Ellingsen & Ulf Soderstrom, 2001. "Monetary Policy and Market Interest Rates," American Economic Review, American Economic Association, vol. 91(5), pages 1594-1607, December.
  22. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June.
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  25. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
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