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Fundamental uncertainty and unconventional monetary policy: an info-gap approach

Yakov Ben-Haim, Maria Demertzis and Jan Willem End ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper applies the info-gap approach to the unconventional monetary policy of the Eurosystem and so takes into account the fundamental uncertainty on inflation shocks and the transmission mechanism. The outcomes show that a more demanding monetary strategy, in terms of lower tolerance for output and inflation gaps, entails less robustness against uncertainty, particularly if financial variables are taken into account. Augmenting the Taylor rule with a financial variable leads to a smaller loss of robustness than taking into account the effect of financial imbalances on the economy. However, in some situations, the augmented model is more robust than the baseline model. A conclusion from our framework is that including financial imbalances in the monetary policy objective does not necessarily increase policy robustness, and may even decrease it.

Keywords: Monetary Policy; Monetary Strategy; Knightian uncertaint; info-gaps (search for similar items in EconPapers)
JEL-codes: E42 E47 E52 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-mac and nep-mon
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