The Implications of Uncertainty for Monetary Policy

Geoffrey Shuetrim and Christopher Thompson
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Christopher Thompson: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: In this paper we use a simple model of the Australian economy to empirically examine the consequences of parameter uncertainty for optimal monetary policy. Optimal policy responses are derived for a monetary authority that targets inflation and output stability. Parameter uncertainty is characterised by the estimated distribution of the model coefficient estimates. Learning is ruled out, so the monetary authority can commit to its ex ante policy response. We find that taking account of parameter uncertainty can recommend more, rather than less, activist use of the policy instrument. While we acknowledge that this finding is specific to the model specification, parameter estimates and the shocks analysed, the result does stand in contrast to the widely held belief that the generic implication of parameter uncertainty is more conservative policy.

Keywords: optimal monetary policy; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 1999-11
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: The Implications of Uncertainty for Monetary Policy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp1999-10

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