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Designing monetary policy rules in an uncertain economic environment

Author

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  • Michael Dotsey
  • Charles I. Plosser

Abstract

A well-designed monetary policy can help the economy respond efficiently to economic disturbances by limiting the deviation of economic activity from its potential while keeping inflation close to its desired rate. But successful implementation of such strategies must confront significant challenges arising from various forms of economic uncertainty. In this article, Michael Dotsey and Charles Plosser discuss the design of monetary policy rules in an environment in which policymakers face two distinct forms of uncertainty: the uncertainty surrounding the precise values of key policy variables that often appear as determinants in such rules, and learning uncertainty, which arises when people have only an incomplete knowledge of the economy itself.

Suggested Citation

  • Michael Dotsey & Charles I. Plosser, 2012. "Designing monetary policy rules in an uncertain economic environment," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-9.
  • Handle: RePEc:fip:fedpbr:y:2012:i:q1:p:1-9
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2012/q1/brq112_designing-monetary-policy-rules-in-uncertain-economic-environment.pdf
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    References listed on IDEAS

    as
    1. Roc Armenter, 2011. "Output gaps: uses and limitation," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-8.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Keith Sill, 2011. "Inflation dynamics and the New Keynesian Phillips curve," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 17-25.
    4. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
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    Keywords

    Monetary policy ; Uncertainty;

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