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Optimal Policy Under Model Uncertainty: A Structural-Bayesian Estimation Approach

  • Alexander Kriwoluzky
  • Christian Stoltenberg

In this paper we propose a novel methodology to analyze optimal policies under model uncertainty in micro-founded macroeconomic models. As an application we assess the relevant sources of uncertainty for the optimal conduct of monetary policy within (parameter uncertainty) and across models (specification uncertainty) using EU 13 data. Parameter uncertainty matters only if the zero bound on interest rates is explicitly taken into account. In any case, optimal monetary policy is highly sensitive with respect to specification uncertainty implying substantial welfare gains of a robustly-optimal rule that incorporates this risk.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2007-040.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2007-040.

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Length: 42 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2007-040
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  1. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
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  3. Pierpaolo Benigno & Michael Woodford, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," NBER Working Papers 12672, National Bureau of Economic Research, Inc.
  4. Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
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