IDEAS home Printed from https://ideas.repec.org/a/ija/ancoec/v2y2005i1p1-24.html
   My bibliography  Save this article

Implications of Parameter Estimation Uncertainty for the Central Banker Behaviour

Author

Listed:
  • Jean-Guillaume Sahuc

Abstract

This paper studies the implications of parameter estimation uncertainty on the central banker behaviour. It first describes the optimal monetary policy rule obtained by the linear quadratic stochastic control approach. The treatment of parameter estimation uncertainty is covered by the introduction of the full variance-covariance matrix of the parameter estimates in the optimal control theory. It then examines how this rule ought to be modified according to the preferences of the monetary authorities when there is uncertainty about the estimation of the persistence and/or transmission parameters. Our application to the euro area shows that (i) the conservatism principle is found relevant only when the central banker has an inflation and output stabilization objective, (ii) introducing an interest rate smoothing objective makes the central banker more aggressive, (ii) with conventional values for the weights of the loss function, there are few differences between the parameters of the rule under certainty-equivalence and those under uncertainty.

Suggested Citation

  • Jean-Guillaume Sahuc, 2005. "Implications of Parameter Estimation Uncertainty for the Central Banker Behaviour," The International Journal of Applied Economics, Department of General Business, Southeastern Louisiana University, vol. 2(1), pages 1-24, March.
  • Handle: RePEc:ija:ancoec:v:2:y:2005:i:1:p:1-24
    as

    Download full text from publisher

    File URL: http://www2.selu.edu/orgs/ijae/Journal%201/IJAE%20MARCH%202005%20SAHUC%2003%2005%202005%20FINAL211.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    European monetary policy; parameter estimation uncertainty; linear quadratic stochastic control;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ija:ancoec:v:2:y:2005:i:1:p:1-24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Yu Hsing (email available below). General contact details of provider: https://edirc.repec.org/data/deselus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.