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Uncertainty, learning, and gradual monetary policy

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  • Brian P. Sack

Abstract

The value of a vast array of financial assets are functions of rates or prices determined in OTC, interbank, or other off-exchange markets. In order to price such derivative assets, underlying rate and price indexes are routinely sampled and estimated. To guard against misreporting, whether unintentional or for market manipulation, many standard contracts utilize a technique known as trimmed-means. This paper points out that this polling problem falls within the statistical framework of robust estimation. Intuitive criteria for choosing among robust valuation procedures are discussed. In particular, the approach taken is to minimize the worst-case scenario arising from a false report. The finite sample performance of the procedures that qualify, the trimmed-mean and the Huber-estimator, are examined in a set of simulation experiments.

Suggested Citation

  • Brian P. Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1998-34
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    References listed on IDEAS

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    Cited by:

    1. Lavan Mahadeva & Gabriel Sterne, 2002. "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England.
    2. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Proceedings, Federal Reserve Bank of Cleveland, pages 1379-1423.
    3. Stephanie Schmitt-Grohé & Martín Uribe, 2009. "Liquidity traps with global Taylor Rules," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 85-106.
    4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    5. Sharon Kozicki & Peter A. Tinsley, 2002. "Term premia : endogenous constraints on monetary policy," Research Working Paper RWP 02-07, Federal Reserve Bank of Kansas City.
    6. repec:ecb:ecbrbu:2018:0045:1 is not listed on IDEAS
    7. Gabriel Srour, 2003. "Some Notes on Monetary Policy Rules with Uncertainty," Staff Working Papers 03-16, Bank of Canada.
    8. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2003. "Missing Aggregate Dynamics: On the Slow Convergence of Lumpy Adjustment Models," Cowles Foundation Discussion Papers 1430, Cowles Foundation for Research in Economics, Yale University, revised Apr 2008.
    9. Luisa Corrado & Sean Holly, 2004. " Habit Formation and Interest Rate Smoothing," CDMA Conference Paper Series 0404, Centre for Dynamic Macroeconomic Analysis.
    10. Driffill, John & Rotondi, Zeno, 2007. "Inertia in Taylor Rules," CEPR Discussion Papers 6570, C.E.P.R. Discussion Papers.
    11. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
    12. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
    13. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2003. "Adjustment Is Much Slower Than You Think," Working Papers 865, Economic Growth Center, Yale University.
    14. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand.
    15. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June.
    16. Jeremy C. Stein & Adi Sunderam, 2015. "Gradualism in Monetary Policy: A Time-Consistency Problem?," NBER Working Papers 21569, National Bureau of Economic Research, Inc.
    17. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    18. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.

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    Keywords

    Monetary policy ; Monetary theory;

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