Monetary policy with imperfect knowledge
Athanasios Orphanides () and
John Williams ()
No 2005-51, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.
Keywords: Monetary policy; Interest rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-knm, nep-mac and nep-mon
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Journal Article: Monetary Policy with Imperfect Knowledge (2006)
Working Paper: Monetary policy with imperfect knowledge (2005)
Working Paper: Monetary Policy with Imperfect Knowledge (2001)
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