A Bayesian approach to optimal monetary policy with parameter and model uncertainty

Timothy Cogley (), Bianca De Paoli (), Christian Matthes, Kalin Nikolov and Anthony Yates ()

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 12, 2186-2212

Abstract: This paper undertakes a Bayesian analysis of optimal monetary policy for the U.K. We estimate a suite of monetary-policy models that include both forward- and backward-looking representations as well as large- and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimized for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimized for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilization in forward-looking models.

Keywords: Monetary policy; Bayesian analysis; Statistical decision theory; Quantitative policy modeling (search for similar items in EconPapers)
JEL-codes: C11 C44 C54 E52 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (29)

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Working Paper: A Bayesian approach to optimal monetary policy with parameter and model uncertainty (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:12:p:2186-2212

DOI: 10.1016/j.jedc.2011.02.006

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