Monetary policy tightening in response to uncertain stagflationary shocks: a model-based analysis

Anna Bartocci, Alessandro Cantelmo, Alessandro Notarpietro and Massimiliano Pisani

No 1433, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We evaluate the 'robust' monetary policy rate tightening in response to a stagflationary shock of uncertain magnitude using a medium-scale New Keynesian model. Under uncertainty, the tightening should generally be milder than under no uncertainty in order to 'perform well' in different states of the world. The results hold true especially when financial tensions materialize under an excessive tightening of monetary policy. On the contrary, if the policy response to large stagflationary shocks is perceived as insufficient in a context of high inflation persistence, then the tightening of monetary policy should be as strong as in the case of no uncertainty.

Keywords: monetary policy; uncertainty; robustness; minimax; bayesian decision making. (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1433_23

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