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Fundamental uncertainty and unconventional monetary policy: an info-gap approach

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  • Yakov Ben-Haim
  • Maria Demertzis
  • Jan Willem van den End

Abstract

This paper applies the info-gap approach to the unconventional monetary policy of the Eurosystem and so takes into account the fundamental uncertainty on inflation shocks and the transmission mechanism. The outcomes show that a more demanding monetary strategy, in terms of lower tolerance for output and inflation gaps, entails less robustness against uncertainty, particularly if financial variables are taken into account. Augmenting the Taylor rule with a financial variable leads to a smaller loss of robustness than taking into account the effect of financial imbalances on the economy. However, in some situations, the augmented model is more robust than the baseline model. A conclusion from our framework is that including financial imbalances in the monetary policy objective does not necessarily increase policy robustness, and may even decrease it.

Suggested Citation

  • Yakov Ben-Haim & Maria Demertzis & Jan Willem van den End, 2017. "Fundamental uncertainty and unconventional monetary policy: an info-gap approach," Working Papers 19317, Bruegel.
  • Handle: RePEc:bre:wpaper:19317
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    References listed on IDEAS

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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