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Monetary policy with uncertain parameters

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Abstract

In a simple dynamic macroeconomic model, it is shown that uncertainty about structural parameters does not necessarily lead to more cautious monetary policy, refining the accepted wisdom concerning the effects of parameter uncertainty on optimal policy. In particular, when there is uncertainty about the persistence of inflation, it is optimal for the central bank to respond more aggressively to shocks than if the parameter were known with certainty, since the central bank wants to avoid bad outcomes in the future. Uncertainty about other parameters, in contrast, acts to dampen the policy response.

Suggested Citation

  • Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," SSE/EFI Working Paper Series in Economics and Finance 308, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0308
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    More about this item

    Keywords

    Optimal monetary policy; parameter uncertainty; Brainard conservatism principle; interest rate smoothing.;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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