Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom

Simon Hall, Chris Salmon, Anthony Yates () and Nicoletta Batini

Bank of England working papers from Bank of England

Abstract: This paper reports an investigation of the effects of additive and multiplicative uncertainty upon the stabilisation properties of a simple base money rule for monetary policy. Using a five-equation empirical model of the United Kingdom, it is shown that changes in the extent of additive uncertainty have no effect on the 'optimal' degree of policy responsiveness to shocks to the economy. However, it is found that policy-makers should respond by less to shocks in the face of multiplicative uncertainty, and, as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard's (1967) theoretical analysis and could be interpreted as justifying a gradualist monetary policy.

Date: 1999-06
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Citations: View citations in EconPapers (23)

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