Monetary policy with uncertain parameters

Ulf Söderström ()

No 308, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In a simple dynamic macroeconomic model, it is shown that uncertainty about structural parameters does not necessarily lead to more cautious monetary policy, refining the accepted wisdom concerning the effects of parameter uncertainty on optimal policy. In particular, when there is uncertainty about the persistence of inflation, it is optimal for the central bank to respond more aggressively to shocks than if the parameter were known with certainty, since the central bank wants to avoid bad outcomes in the future. Uncertainty about other parameters, in contrast, acts to dampen the policy response.

Keywords: Optimal monetary policy; parameter uncertainty; Brainard conservatism principle; interest rate smoothing. (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Pages: 21 pages
Date: 1999-03-08
New Economics Papers: this item is included in nep-pol
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Citations: View citations in EconPapers (6)

Published in Scandinavian Journal of Economics, 2002, pages 125-145.

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Related works:
Journal Article: Monetary Policy with Uncertain Parameters (2002)
Working Paper: Monetary policy with uncertain parameters (2000)
Working Paper: Monetary policy with uncertain parameters (1999)
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