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Probing Potential Output: Monetary Policy, Credibility And Optimal Learning Under Uncertainty

  • James Yetman

    (Bank of Canada)

The effective conduct of monetary policy is hampered by uncertainty surrounding the level of potential output. Here, the case for following a more aggressive policy to learn about the economy is considered in a model where potential output is changing over time. Following such a policy may be referred to as probing or experimenting.In this model, with parameters calibrated to recent Canadian data, the optimal amount of probing is small and increases only a little with credibility. Only for unrealistically large amounts of uncertainty does the optimal policy with probing diverge significantly from a policy that ignores learning, and even then, for most forms of uncertainty, the optimal amount of probing diminishes as credibility rises.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 181.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:181
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CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain

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