IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Uncertainty about Length of the Monetary Policy Transmission Lag: Implications for Monetary Policy

  • Ha, Yuong

    ()

    (Economics Department, Reserve Bank of New Zealand)

Registered author(s):

Using stochastic simulations of the Reserve Bank of New Zealand’s macroeconomic model, this paper examines the implications for monetary policy of uncertainty about the length of the monetary policy transmission lag. Uncertainty is examined from two perspectives. The first investigates the robustness of efficient inflation-forecast-based rules under transmission lag uncertainty. Robustness, in this paper, is measured by the variability of the stabilisation properties of policy rules. The results indicate that rules that are less aggressive and more forward looking are more robust than rules that are more aggressive and less forward looking. By using more-robust rules, policy makers are more likely to achieve outcomes that are closer to what they expect. However, while less aggressive and more forward-looking rules are more robust, the implication for monetary policy is less clear. Typically, these more-robust policy rules have higher absolute levels of inflation variability than less-robust rules. In other words, less-robust rules typically do a better job at controlling inflation regardless of the transmission lag and regardless of what the central bank believes the transmission lag to be. The second aspect asks, if the central bank is uncertain about the length of the transmission lag, is it better to overestimate or underestimate the lag? If the central bank overestimates the lag, it believes inflation is harder to control than it really is. As a result, policy responses tend to be stronger than would be the case if the central bank knew the truth. Underestimating the lag has the opposite effect – the central bank believes inflation is easier to control and policy responds less aggressively than would be the case if the central bank knew the truth. This result suggests that it is better to overestimate the transmission lag. By behaving as if inflation is harder to control, the central bank is able to counter inflationary pressures earlier and do a relatively better job at stabilising the economy.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.riksbank.com/upload/3528/WP_94.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://www.riksbank.com/upload/3528/WP_94.pdf [301 Moved Permanently]--> http://www.riksbank.se/en/upload/3528/WP_94.pdf). If this is indeed the case, please notify (Lena Löfgren)


Download Restriction: no

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 94.

as
in new window

Length: 38 pages
Date of creation: 01 Oct 1999
Date of revision:
Handle: RePEc:hhs:rbnkwp:0094
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0094. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lena Löfgren)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.