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Monetary policy in an uncertain world: probability models and the design of robust monetary rules

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  • Paul Levine

Abstract

Purpose - The purpose of this paper is to describe the transformation of macro-modelling from reduced form behavioural equations estimated separately, through to contemporary microfounded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. It is argued that estimated DSGE models should be seen as probability models that can be used as a laboratory for assessing new policies in a new and uncertain environment. The methodology is particularly relevant for emerging economies such as India. Design/methodology/approach - This paper has analytical, empirical and policy dimensions. Estimating DSGE models by Bayesian-Maximum-Likelihood methods results in a posterior distribution of parameters that quantifies the uncertainty facing the policymaker. This, in turn, can be used for robust policy design. Findings - The paper reviews evidence that inflation targeting in emerging economies welfare-dominates exchange rate targeting. Originality/value - This lies in the papers reviewed including those involving the author.

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  • Paul Levine, 2012. "Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 70-88, April.
  • Handle: RePEc:eme:igdrpp:v:5:y:2012:i:1:p:70-88
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    Cited by:

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    2. Simplice A. Asongu, 2014. "Does money matter in Africa?: New empirics on long- and short-run effects of monetary policy on output and prices," Indian Growth and Development Review, Emerald Group Publishing, vol. 7(2), pages 142-180, November.
    3. A. Asongu, Simplice & E. Folarin, Oludele & Biekpe, Nicholas, 2020. "The Long-Run Stability of Money in the ProposedE ast AfricanMonetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 35(3), pages 457-478.
    4. Simplice A. Asongu & Oludele E. Folarin & Nicholas Biekpe, 2019. "The Stability of Demand for Money in the Proposed Southern African Monetary Union," Research Africa Network Working Papers 19/025, Research Africa Network (RAN).
    5. Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2013. "Has India emerged? Business cycle stylized facts from a transitioning economy," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 157-172.
    6. Holtemöller, Oliver & Mallick, Sushanta, 2015. "Global Food Prices and Business Cycle Dynamics in an Emerging Market Economy," IWH Discussion Papers 15/2015, Halle Institute for Economic Research (IWH).
    7. A. Asongu, Simplice & E. Folarin, Oludele & Biekpe, Nicholas, 2020. "The Long-Run Stability of Money in the ProposedE ast AfricanMonetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 35(3), pages 457-478.
    8. Holtemöller, Oliver & Mallick, Sushanta, 2016. "Global food prices and monetary policy in an emerging market economy: The case of India," Journal of Asian Economics, Elsevier, vol. 46(C), pages 56-70.
    9. Ghosh, Taniya & Bhadury, Soumya Suvra, 2018. "Has Money Lost Its Relevance? Resolving the Exchange Rate Disconnect Puzzle," MPRA Paper 90627, University Library of Munich, Germany.
    10. Muhammad Ali Nasir & Milton Yago & Alaa M. Soliman & Junjie Wu, 2016. "Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1136098-113, December.

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    More about this item

    Keywords

    India; Inflation; Interest rates; Financial modelling; Monetary policy; Emerging economies; Structured uncertainty; Dynamic stochastic general equilibrium models; Robustness; Bayesian estimation; Interest-rate rules;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • 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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