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Monetary Policy and Uncertainty about the Natural Unemployment Rate

  • Volker Wieland

    (Federal Reserve Board)

This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and inflation close to target.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1997 with number 11.

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Handle: RePEc:sce:scecf7:11
Contact details of provider: Postal: CEF97, Stanford University, Department of Economics, Stanford CA USA
Web page: http://bucky.stanford.edu/cef97/

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