Insurance Policies for Monetary Policy in the Euro Area

Keith Kuester and Volker Wieland

No 07-044, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: In this paper, we design a monetary policy for the euro area at the start of monetary union. We compare and ultimately combine Bayesian and worst-case analysis using four reference models developed at the ECB and estimated with pre-EMU synthetic data. We start by computing the cost of insurance against model uncertainty. We find that maximum insurance across this range of models can be obtained at moderate costs relative to a Bayesian policy with flat priors. However, there are three shortcomings of this worst-case insurance policy: (i) prior beliefs indicate that such insurance is strongly oriented towards the model with highest baseline losses; (ii) the Minimax policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy; and (iii) the Minimax policy offers no avenue for incorporating posterior model probabilities derived from data available since monetary union. Thus, we propose preferences for robust policy design that reflect a mixture of the Bayesian and Minimax approaches. These preferences incorporate model probabilities while still giving extra weight to the worst uncertain outcomes

Keywords: model uncertainty; robustness; monetary policy rules; minimax; euro area (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2008-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www-siepr.stanford.edu/repec/sip/07-044.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www-siepr.stanford.edu:80 (nodename nor servname provided, or not known)

Related works:
Journal Article: Insurance Policies for Monetary Policy in the Euro Area (2010)
Journal Article: Insurance Policies for Monetary Policy in the Euro Area (2010)
Working Paper: Insurance policies for monetary policy in the euro area (2008)
Working Paper: Insurance Policies for Monetary Policy in the Euro Area (2005)
Working Paper: Insurance policies for monetary policy in the euro area (2005)
Working Paper: Insurance Policies for Monetary Policy in the Euro Area (2005)
Working Paper: Insurance policies for monetary policy in the Euro area (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sip:dpaper:07-044

Access Statistics for this paper

More papers in Discussion Papers from Stanford Institute for Economic Policy Research Contact information at EDIRC.
Bibliographic data for series maintained by Anne Shor ( this e-mail address is bad, please contact ).