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Monetary policy tightening in response to uncertain stagflationary shocks: a model-based analysis

Author

Listed:
  • Anna Bartocci

    (Bank of Italy)

  • Alessandro Cantelmo

    (Bank of Italy)

  • Alessandro Notarpietro

    (Bank of Italy)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract

We evaluate the 'robust' monetary policy rate tightening in response to a stagflationary shock of uncertain magnitude using a medium-scale New Keynesian model. Under uncertainty, the tightening should generally be milder than under no uncertainty in order to 'perform well' in different states of the world. The results hold true especially when financial tensions materialize under an excessive tightening of monetary policy. On the contrary, if the policy response to large stagflationary shocks is perceived as insufficient in a context of high inflation persistence, then the tightening of monetary policy should be as strong as in the case of no uncertainty.

Suggested Citation

  • Anna Bartocci & Alessandro Cantelmo & Alessandro Notarpietro & Massimiliano Pisani, 2023. "Monetary policy tightening in response to uncertain stagflationary shocks: a model-based analysis," Temi di discussione (Economic working papers) 1433, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1433_23
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary policy; uncertainty; robustness; minimax; bayesian decision making.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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