The Effect of Uncertainty on Monetary Policy: How Good are the Brakes?

Guy Debelle () and Adam Cagliarini
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Adam Cagliarini: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: In practice, monetary policy changes tend to produce a smooth path for interest rates while the path of policy interest rates generated by models is often considerably more variable. This paper investigates whether the inclusion of uncertainty can help reconcile the theory to the practice. It shows that parameter uncertainty does not induce much smoothness when its effects are directly incorporated into a model. Uncertainty about the interest sensitivity of output can increase the smoothness of optimal policy in a model, but the path of policy interest rates generated is still considerably more variable than that observed in practice.

Keywords: interest rate smoothing; monetary policy; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
Date: 2000-10
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Citations: View citations in EconPapers (3)

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https://www.rba.gov.au/publications/rdp/2000/pdf/rdp2000-07.pdf (application/pdf)

Related works:
Chapter: The Effect of Uncertainty on Monetary Policy: How Good are the Brakes? (2002)
Working Paper: The Effect of Uncertainty on Monetary Policy: How Good are the Brakes? (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2000-07

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