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A Bayesian approach to optimal monetary policy with parameter and model uncertainty

Author Info

Listed author(s):
  • Cogley, Timothy

    ()

    (New York University)

  • de Paoli, Bianca

    ()

    (Bank of England)

  • Matthes, Christian

    ()

    (Universitat Pompeu Fabra)

  • Nikolov, Kalin

    ()

    (European Central Bank)

  • Yates, Tony

    ()

    (Bank of England)

Abstract

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.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2011/wp414.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 414.

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Length: 74 pages
Date of creation: 02 Mar 2011
Handle: RePEc:boe:boeewp:0414
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Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
  • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
  • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

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Cited by:

  1. William A. Brock & Steven N. Durlauf, 2015. "On Sturdy Policy Evaluation," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 447-473.
  2. Vito Polito & Peter Spencer, "undated". "UK Macroeconomic Volatility and the Welfare Costs of Inflation," Discussion Papers 11/21, Department of Economics, University of York.
  3. Francesca Rondina, 2010. "The role of model uncertainty and learning in the U.S. postwar policy response to oil prices," Working Papers 478, Barcelona Graduate School of Economics.
  4. Alexander Kriwoluzky & Christian A. Stoltenberg, 2016. "Nested Models and Model Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(2), pages 324-353, 04.
  5. Ravenna, Federico, 2012. "Optimal monetary policy and model selection in a real-time learning environment," Economics Letters, Elsevier, vol. 114(3), pages 322-325.
  6. Rondina, Francesca, 2012. "The role of model uncertainty and learning in the US postwar policy response to oil prices," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1009-1041.
  7. Francesca Rondina, 2010. "Policy Evaluation and Uncertainty About the Effects of Oil Prices on Economic Activity," Working Papers 522, Barcelona Graduate School of Economics.
  8. Gradojevic, Nikola & Gençay, Ramazan, 2013. "Fuzzy logic, trading uncertainty and technical trading," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 578-586.
  9. Francesca Rondina, 2017. "Model Uncertainty and the Direction of Fit of the Postwar U.S. Phillips Curve(s)," Working Papers 1702E, University of Ottawa, Department of Economics.
  10. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy; The Role of Liquidity Frictions," IMF Working Papers 16/138, International Monetary Fund.
  11. Federico Ravenna, 2014. "How Central Banks Learn the True Model of the Economy," Cahiers de recherche 1409, CIRPEE.
  12. Sheen, Jeffrey & Wang, Ben Zhe, 2016. "Animal spirits and optimal monetary policy design in the presence of labour market frictions," Economic Modelling, Elsevier, vol. 52(PB), pages 898-912.
  13. Anna Almosova, 2016. "Labor Market Frictions and Monetary Policy Design," SFB 649 Discussion Papers SFB649DP2016-054, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  14. Anderson, Evan W. & Brock, William & Sanstad, Alan H., 2016. "Robust Consumption and Energy Decisions," 2017 Allied Social Science Association (ASSA) Annual Meeting, January 6-8, 2017, Chicago, Illinois 250117, Agricultural and Applied Economics Association.

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