Economics at your fingertips  

Measuring Uncertainty of Optimal Simple Monetary Policy Rules in DSGE models

Mariusz Górajski () and Zbigniew Kuchta
Additional contact information
Mariusz Górajski: Faculty of Economics and Sociology, University of Lodz

No 6/2018, Lodz Economics Working Papers from University of Lodz, Faculty of Economics and Sociology

Abstract: This paper presents a new approach to measure the parameter uncertainty for optimal simple monetary policy rules in the New Keynesian dynamic stochastic general equilibrium models. More precisely, we propose a new algorithm which enables to directly introduce parameter uncertainty into the optimal simple precommitment rule problem. As a result we find distributions of the optimal monetary policy reactions and the minimized welfare losses. To compare the distributions of the monetary policy parameters and the welfare losses we apply the first order stochastic dominance ordering (SD1). The SD1 inequality between the probability distribution is verified by means of the Kolmogorov-Smirnov test. The proposed algorithms are applied to the Erceg, Henderson and Levine (2000) small-scale closed economy model estimated for the Polish economy. For the welfare-loss-minimizing central bank, we examine three types of the dynamic specification of its policy rule: backward-, current- and forward-looking. Finally, for a given set of optimal and implementable monetary policy rules, we show that the fully specified forward-looking monetary policy rule with interest rate smoothing mechanism minimizes the welfare-loss in the sense of the stochastic ordering SD1.

Keywords: optimal monetary policy; DSGE; uncertainty (search for similar items in EconPapers)
JEL-codes: E47 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
Date: 2018-10-15
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) First version, 2018 (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:

Access Statistics for this paper

More papers in Lodz Economics Working Papers from University of Lodz, Faculty of Economics and Sociology Contact information at EDIRC.
Bibliographic data for series maintained by LEWP Editors ().

Page updated 2019-05-10
Handle: RePEc:ann:wpaper:6/2018