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Guarding Against Large Policy Errors under Model Uncertainty

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  • Gino Cateau

Abstract

How can policy-makers avoid large policy errors when they are uncertain about the true model of the economy? The author discusses some recent approaches that can be used for that purpose under two alternative scenarios: (i) the policy-maker has one reference model for choosing policy but cannot take a stand as to how that model is misspecified, and (ii) the policy-maker, being uncertain about the economy's true structure, entertains multiple distinct models of the economy. The author shows how these approaches can be implemented in practice using as benchmark models simplified versions of Fuhrer and Moore (1995) and Christiano, Eichenbaum, and Evans (2005).

Suggested Citation

  • Gino Cateau, 2006. "Guarding Against Large Policy Errors under Model Uncertainty," Staff Working Papers 06-13, Bank of Canada.
  • Handle: RePEc:bca:bocawp:06-13
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    References listed on IDEAS

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    1. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    2. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Staff Working Papers 04-4, Bank of Canada.
    3. Haluk Ergin & Faruk Gul, 2003. "A Subjective Theory of Compound Lotteries," Levine's Bibliography 506439000000000406, UCLA Department of Economics.
    4. 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.
    5. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, September.
    6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    7. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    8. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
    9. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, April.
    10. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
    11. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
    12. Gino Cateau, 2005. "Monetary Policy under Model and Data-Parameter Uncertainty," Staff Working Papers 05-6, Bank of Canada.
    13. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
    14. Philippe Robert-Demontrond & R. Ringoot, 2004. "Introduction," Post-Print halshs-00081823, HAL.
    15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    16. Engert, Walter & Selody, Jack, 1998. "Uncertainty and Multiple Paradigms of the Transmission Mechanism," Staff Working Papers 98-7, Bank of Canada.
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    Cited by:

    1. repec:cys:ecocyb:v:50:y:2017:i:2:p:5-22 is not listed on IDEAS
    2. Richard Dennis, 2007. "Model uncertainty and monetary policy," Working Paper Series 2007-09, Federal Reserve Bank of San Francisco.
    3. Levine, Paul & Pearlman, Joseph, 2010. "Robust monetary rules under unstructured model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 456-471, March.

    More about this item

    Keywords

    Uncertainty and monetary policy;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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