Monetary policy with unknown natural rates

Thomas Lubik and Jessica Sackett Romero

Richmond Fed Economic Brief, 2011, issue Jul, No 11-7

Abstract: The "unemployment gap" is an important factor in monetary policy decisions. But the size of the gap depends on the level of natural rate of unemployment, which is inherently unobservable. The uncertainty surrounding estimates of the natural rate, and the costs of mismeasuring it, may recommend a policy rule that responds to the rate of change in the actual unemployment rate rather than to the implied unemployment gap.

Keywords: Inflation (Finance); Monetary policy; Unemployment (search for similar items in EconPapers)
Date: 2011
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