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Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom

  • Simon Hall
  • Chris Salmon
  • Tony Yates
  • Nicoletta Batini

This paper reports an investigation of the effects of additive and multiplicative uncertainty upon the stabilisation properties of a simple base money rule for monetary policy. Using a five-equation empirical model of the United Kingdom, it is shown that changes in the extent of additive uncertainty have no effect on the 'optimal' degree of policy responsiveness to shocks to the economy. However, it is found that policy-makers should respond by less to shocks in the face of multiplicative uncertainty, and, as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard's (1967) theoretical analysis and could be interpreted as justifying a gradualist monetary policy.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1999/wp96.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 96.

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Date of creation: Jun 1999
Handle: RePEc:boe:boeewp:96
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