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Uncertainty and Monetary Policy Rules in the United States

  • Christopher Martin

    ()

  • Costas Milas

This paper analyses the impact of uncertainty about the true state of the economy on monetary policy rules in the US since the early 1980s. Extending the Taylor rule to allow for this type of uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behaviour of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy. We find that the impact of uncertainty was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1989-90, when uncertainty increased interest rates by up to 50 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 50 basis points over five years.

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File URL: http://www.brunel.ac.uk/329/efwps/0522.pdf
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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 05-22.

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Length: 27 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:bru:bruedp:05-22
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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