Optimal Monetary Policy under Risk and Uncertainty

Diego Nocetti

Economic Issues Journal Articles, 2007, vol. 12, issue 1, 93-108

Abstract: This paper seeks to characterise optimal monetary policy rules in the presence of risk and uncertainty. I explore a situation in which the true parameters and the true structure of the economy are unknown to the policymaker, and he is reluctant to make a decision based on a single distribution estimate (i.e. he faces Knightian uncertainty). I show analytically that if the policymaker does not know the true structure of the economy he will be more cautious than in the case of only parameter risk. Further, I show that Knightian uncertainty can also lead to an extra precautionary motive when one considers its interaction with parameter risk. In a simple exercise, I provide empirical estimates that demonstrate that adjustments due to parameter and structural risk and Knightian uncertainty can potentially be quite large.

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.economicissues.org.uk/Files/107eOptimal ... skandUncertainty.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eis:articl:107nocetti

Access Statistics for this article

More articles in Economic Issues Journal Articles from Economic Issues Contact information at EDIRC.
Bibliographic data for series maintained by Dan Wheatley ().