Monetary Policy-making in the Presence of Knightian Uncertainty
This paper explores the extent to which Knightian uncertainty can explain features of interest rate paths observed in practice that are not generally replicated by models of optimal monetary policy. Interest rates tend to move in a sequence of steps in a given direction, or remain constant for some time, rather than experiencing the frequent reversals that commonly arise from optimal policy simulations. We categorise the types of uncertainty that have been explored to date in terms of the decision-making behaviour they imply. From this, we suggest a more intuitively appealing formulation of Knightian uncertainty than the one that has previously been used in the analysis of monetary policy. Within a very simple optimal control problem, we show that our preferred formalisation is consistent with interest rate paths with periods of no change. This suggests that the presence of Knightian uncertainty may explain some features of monetary policy-makers’ behaviour.
|Date of creation:||Dec 2000|
|Date of revision:|
|Contact details of provider:|| Postal: GPO Box 3947, Sydney NSW 2001|
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arturo Estrella & Frederic S. Mishkin, 1999.
"Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty,"
in: Monetary Policy Rules, pages 405-436
National Bureau of Economic Research, Inc.
- Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York.
- Arturo Estrella & Frederic S. Mishkin, 2000. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Working Papers 6518, National Bureau of Economic Research, Inc.
- Svensson, L-E-O, 1997.
"Inflation Targeting : Some Extensions,"
625, Stockholm - International Economic Studies.
- Onatski, Alexei & Stock, James H., 2002.
"Robust Monetary Policy Under Model Uncertainty In A Small Model Of The U.S. Economy,"
Cambridge University Press, vol. 6(01), pages 85-110, February.
- Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
- 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.
- David Schmeidler, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Levine's Working Paper Archive
7662, David K. Levine.
- Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
- Ball, Laurence, 1999.
"Efficient Rules for Monetary Policy,"
Wiley Blackwell, vol. 2(1), pages 63-83, April.
- Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
- Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
- Geoffrey Shuetrim & Christopher Thompson, 2003.
"The Implications of Uncertainty for Monetary Policy,"
The Economic Record,
The Economic Society of Australia, vol. 79(246), pages 370-379, 09.
- Geoffrey Shuetrim & Christopher Thompson, 1999. "The Implications of Uncertainty for Monetary Policy," RBA Research Discussion Papers rdp1999-10, Reserve Bank of Australia.
- LeRoy, Stephen F & Singell, Larry D, Jr, 1987. "Knight on Risk and Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 394-406, April.
- Gilboa, Itzhak & Schmeidler, David, 1989.
"Maxmin expected utility with non-unique prior,"
Journal of Mathematical Economics,
Elsevier, vol. 18(2), pages 141-153, April.
- Sack, Brian, 2000. "Does the fed act gradually? A VAR analysis," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 229-256, August.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2000-10. 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: (Paula Drew)
If references are entirely missing, you can add them using this form.