A Bayesian approach to optimal monetary policy with parameter and model uncertainty
This paper undertakes a Bayesian analysis of optimal monetary policy for the United Kingdom. We estimate a suite of monetary policy models that include both forward and backward-looking representations as well as large and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimised for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimised for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilisation in forward-looking models.
|Date of creation:||02 Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999.
"The financial accelerator in a quantitative business cycle framework,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
- Brock, William A. & Durlauf, Steven N. & West, Kenneth D., 2007.
"Model uncertainty and policy evaluation: Some theory and empirics,"
Journal of Econometrics,
Elsevier, vol. 136(2), pages 629-664, February.
- William A. Brock & Steven N. Durlauf & Kenneth D. West, 2005. "Model uncertainty and policy evaluation: some theory and empirics," Proceedings, Federal Reserve Bank of San Francisco.
- Brock,W.A. & Durlauf,S.N. & West,K.D., 2004. "Model uncertainty and policy evaluation : some theory and empirics," Working papers 19, Wisconsin Madison - Social Systems.
- William A. Brock & Steven N. Durlauf & Kenneth D. West, 2004. "Model Uncertainty and Policy Evaluation: Some Theory and Empirics," NBER Working Papers 10916, National Bureau of Economic Research, Inc.
- Kapetanios, G. & Labhard, V. & Price, S., 2007.
"Forecasting using Bayesian and information theoretic model averaging: an application to UK inflation,"
07/15, Department of Economics, City University London.
- Kapetanios, George & Labhard, Vincent & Price, Simon, 2008. "Forecasting Using Bayesian and Information-Theoretic Model Averaging: An Application to U.K. Inflation," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 33-41, January.
- George Kapetanios & Vincent Labhard & Simon Price, 2006. "Forecasting using Bayesian and Information Theoretic Model Averaging: An Application to UK Inflation," Working Papers 566, Queen Mary University of London, School of Economics and Finance.
- George Kapetanios & Vincent Labhard & Simon Price, 2005. "Forecasting using Bayesian and information theoretic model averaging: an application to UK inflation," Bank of England working papers 268, Bank of England.
- Levine, Paul & McAdam, Peter & Pearlman, Joseph G. & Pierse, Richard, 2008. "Risk Management in Action. Robust monetary policy rules under structured uncertainty," Working Paper Series 0870, European Central Bank.
- Lars Svensson & Noah Williams, 2005.
"Monetary Policy with Model Uncertainty: Distribution Forecast Targeting,"
NBER Working Papers
11733, National Bureau of Economic Research, Inc.
- Noah Williams & Lars E.O. Svensson, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," Computing in Economics and Finance 2005 108, Society for Computational Economics.
- Svensson, Lars E. O. & Williams, Noah, 2005. "Monetary policy with model uncertainty: distribution forecast targeting," Discussion Paper Series 1: Economic Studies 2005,35, Deutsche Bundesbank, Research Centre.
- Svensson, Lars E O & Williams, Noah, 2007. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," CEPR Discussion Papers 6331, C.E.P.R. Discussion Papers.
- Timothy Cogley & Riccardo Colacito & Lars Peter Hansen & Thomas J. Sargent, 2008. "Robustness and U.S. Monetary Policy Experimentation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1599-1623, December.
- Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2007.
"Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson and Solow and Lucas,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(s1), pages 67-99, 02.
- Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2005. "Benefits from U.S. monetary policy experimentation in the days of Samuelson and Solow and Lucas," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Bianca De Paoli, 2004.
"Monetary Policy and Welfare in a Small Open Economy,"
CEP Discussion Papers
dp0639, Centre for Economic Performance, LSE.
- De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
- Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics 19950, London School of Economics and Political Science, LSE Library.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0414. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If references are entirely missing, you can add them using this form.