Welfare-Maximizing Monetary Policy under Parameter Uncertainty

Rochelle Edge, Thomas Laubach and John Williams

No 2007-11, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the "natural" rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best.

Keywords: Monetary; policy (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 45
Date: 2008-05-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: PDF date: May 30, 2008.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Welfare-maximizing monetary policy under parameter uncertainty (2010)
Journal Article: Welfare‐maximizing monetary policy under parameter uncertainty (2010)
Working Paper: Welfare-Maximizing Monetary Policy Under Parameter Uncertainty (2008)
Working Paper: Welfare-maximizing monetary policy under parameter uncertainty (2007)
Working Paper: Welfare-Maximizing Monetary Policy under Parameter Uncertainty (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2007-11

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DOI: 10.24148/wp2007-11

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