Insurance Policies for Monetary Policy in the Euro Area

Volker Wieland and Keith Kuester

No 100, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context

Keywords: model uncertainty; robustness; monetary policy rules; minimax; euro area (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-cba, nep-ias, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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http://repec.org/sce2005/up.9509.1106594432.pdf (application/pdf)

Related works:
Journal Article: Insurance Policies for Monetary Policy in the Euro Area (2010)
Journal Article: Insurance Policies for Monetary Policy in the Euro Area (2010)
Working Paper: Insurance policies for monetary policy in the euro area (2008)
Working Paper: Insurance Policies for Monetary Policy in the Euro Area (2008)
Working Paper: Insurance Policies for Monetary Policy in the Euro Area (2005)
Working Paper: Insurance policies for monetary policy in the euro area (2005)
Working Paper: Insurance policies for monetary policy in the Euro area (2005)
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