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Monetary Policy with a Wider Information Set: a Bayesian Model Averaging Approach

  • Fabio Milani

    (Princeton University)

Monetary policy has been usually analyzed in the context of small macroeconomic models where central banks are allowed to exploit a limited amount of information. Under these frameworks, researchers typically derive the optimality of aggressive monetary rules, contrasting with the observed policy conservatism and interest rate smoothing. This paper allows the central bank to exploit a wider information set, while taking into account the associated model uncertainty, by employing Bayesian Model Averaging with Markov Chain Model Composition (MC³). In this enriched environment, we derive the optimality of smoother and more cautious policy rates, together with clear gains in macroeconomic efficiency.

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File URL: http://econwpa.repec.org/eps/mac/papers/0401/0401004.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0401004.

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Length: 43 pages
Date of creation: 18 Jan 2004
Handle: RePEc:wpa:wuwpma:0401004
Note: Type of Document - pdf; prepared on Win2000; pages: 43; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  12. Rudebusch, Glenn & Svensson, Lars, 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Seminar Papers 672, Stockholm University, Institute for International Economic Studies.
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  25. repec:cup:macdyn:v:6:y:2002:i:1:p:85-110 is not listed on IDEAS
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