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Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty

  • Yetman, James

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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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 25 (2003)
Issue (Month): 3 (September)
Pages: 311-330

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Handle: RePEc:eee:jmacro:v:25:y:2003:i:3:p:311-330
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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