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Some Notes on Monetary Policy Rules with Uncertainty

Author

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  • Gabriel Srour

Abstract

The author explores the role that Taylor-type rules can play in monetary policy, given the degree of uncertainty in the economy. The optimal rule is derived from a simple infinite-horizon model of the monetary transmission mechanism, with only additive uncertainty. The author then examines how this rule ought to be modified when there is uncertainty about the parameters, the time lags, and the nature of shocks. Quantitative evaluations are subsequently provided. In particular, it is shown that if the degree of persistence of inflation in the Phillips curve is not high, a simple rule such as the original Taylor rule that offsets demand shocks and puts a relatively small weight on inflation shocks may be an appropriate benchmark for the conduct of monetary policy. Conversely, it is argued that if the degree of persistence of inflation in the Phillips curve is high, then finding a Taylor-type rule that can act as a benchmark for monetary policy is likely to be difficult.

Suggested Citation

  • Gabriel Srour, 2003. "Some Notes on Monetary Policy Rules with Uncertainty," Staff Working Papers 03-16, Bank of Canada.
  • Handle: RePEc:bca:bocawp:03-16
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    References listed on IDEAS

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    1. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 537-577, November.
    2. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters,in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
    3. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    4. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    5. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    6. Brian P. Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.).
    7. Eric T. Swanson, 2000. "On signal extraction and non-certainty-equivalence in optimal monetary policy rules," Proceedings, Federal Reserve Bank of San Francisco.
    8. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2004. "The performance and robustness of simple monetary policy rules in models of the Canadian economy," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 978-998, November.
    9. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada.
    10. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters,in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc.
    11. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Staff Working Papers 02-1, Bank of Canada.
    12. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    13. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
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    Cited by:

    1. Christopher Martin & Costas Milas, 2009. "Uncertainty And Monetary Policy Rules In The United States," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 206-215, April.
    2. Christopher Martin & Costas Milas, 2004. "Uncertainty and UK Monetary Policy," Economics and Finance Discussion Papers 04-11, Economics and Finance Section, School of Social Sciences, Brunel University.

    More about this item

    Keywords

    Uncertainty and monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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