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The Effects of Monetary Policy on Unemployment Dynamics under Model Uncertainty: Evidence from the United States and the Euro Area

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  • CARLO ALTAVILLA
  • MATTEO CICCARELLI

Abstract

This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the United States. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policymaker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the United States, which are on average essentially small. Copyright (c) 2009 The Ohio State University.

Suggested Citation

  • Carlo Altavilla & Matteo Ciccarelli, 2009. "The Effects of Monetary Policy on Unemployment Dynamics under Model Uncertainty: Evidence from the United States and the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(7), pages 1265-1300, October.
  • Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:7:p:1265-1300
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    Cited by:

    1. Eagle, David M., 2012. "Nominal GDP targeting for a speedier economic recovery," MPRA Paper 39821, University Library of Munich, Germany.
    2. Carlo Altavilla & Matteo Ciccarelli, 2011. "Monetary Policy Analysis in Real-Time. Vintage combination from a real-time dataset," CSEF Working Papers 274, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Giovanni Dell'Ariccia & Karl Habermeier & Vikram Haksar & Tommaso Mancini-Griffoli, 2017. "Monetary Policy and Financial Stability," RBA Annual Conference Volume (Discontinued), in: Jonathan Hambur & John Simon (ed.),Monetary Policy and Financial Stability in a World of Low Interest Rates, Reserve Bank of Australia.

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