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The Effect of Uncertainty on Monetary Policy: How Good are the Brakes?

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  • Adam Cagliarini
  • Guy Debelle

Abstract

In practice, monetary policy changes tend to produce a smooth path for interest rates while the path of policy interest rates generated by models is often considerably more variable. This paper investigates whether the inclusion of uncertainty can help reconcile the theory to the practice. It shows that parameter uncertainty does not induce much smoothness when its effects are directly incorporated into a model. Uncertainty about the interest sensitivity of output can increase the smoothness of optimal policy in a model, but the path of policy interest rates generated is still considerably more variable than that observed in practice.

Suggested Citation

  • Adam Cagliarini & Guy Debelle, 2000. "The Effect of Uncertainty on Monetary Policy: How Good are the Brakes?," Working Papers Central Bank of Chile 74, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:74
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    References listed on IDEAS

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    Cited by:

    1. Adam Cagliarini & Alexandra Heath, 2000. "Monetary Policy-making in the Presence of Knightian Uncertainty," RBA Research Discussion Papers rdp2000-10, Reserve Bank of Australia.
    2. Kirdan Lees, 2004. "Uncertainty and the open economy: a view through two different lenses," Econometric Society 2004 Australasian Meetings 235, Econometric Society.
    3. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.

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    More about this item

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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