Monetary Policy, Parameter Uncertainty and Optimal Learning

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSince central banks have limited information concerning the transmission channel of monetary policy, they are faced with the difficult task of simultaneously controlling the policy target and estimating the impact of policy actions. A tradeoff between estimation and control arises because policy actions influence estimation and provide information which may improve future performance. I analyze this tradeoff in a simple model with parameter uncertainty and conduct dynamic simulations of the policymaker's decision problem in the presence of the type of uncertainties that arose in the wake of German reunification. A policy that separates learning from control may induce a persistent upward bias in money growth and inflation, just as observed after unification. In contrast, the optimal learning strategy which exploits the tradeoff between control and estimation significantly improves stabilization performance and reduces the likelihood of inflationary bias.

The role of model uncertainty and learning in the US postwar policy response to oil prices

“…This result is a consequence of the speci…c approach used in this paper to account for model uncertainty, in which the policy instrument can generate interactions between the variables of interest in directions that are precluded in the individual models. This …nding is consistent with a number of previous works studying monetary policy in contexts characterized by imperfect knowledge of the true data generating process, which also concluded that uncertainty might induce an attenuated policy response to economic variables (see, for instance, Brainard, 1967;Wieland, 2000a;Svensson, 1999;Rudebusch, 2001; Söderström, 2000, Tetlow andvon zur Muehlen, 2001 for the case of structured model uncertainty). 2 This paper contributes to the existing literature in economics in several aspects.…”

The stability of macroeconomic systems with Bayesian learners

“…For instance, Sargent and Williams (2005) study the e¤ect of priors on escape dynamics in a model where the government is learning. Wieland (2000) adapts the framework of Nyarko and Kiefer (1989) to study optimal control by a monetary authority when the authority is a Bayesian learner. We do not have any policy in this paper and so we cannot address these topics.…”

Learning About Learning in Dynamic Economic Models

“…Research on passive and active learning stochastic control of economic models has been underway for more than thirty years dating back to the early work of Prescott (1972), MacRae (1972) and Taylor (1974) and including work by Norman (1976), Kendrick (1976Kendrick ( , 1980Kendrick ( , 1981, Easley and Kiefer (1988), Kiefer (1989), Kiefer and Nyarko (1989), Tucci (1989), Mizrach (1991), Aghion et al (1991), Amman (1996), Amman andKendrick (1995, 1997), Wieland (2000aWieland ( , 2000b, Beck and Wieland (2002), Tucci (2004), Cosimano andGapen (2005b, 2005a), Cosimano (2008), Tesfaselassie, Schaling and Eijffinger (2007) and others. What have we learned about learning from this research?…”

“…Wieland presented a dynamic programming method with numerical approximation of optimal decision rules, Wieland (2000aWieland ( , 2000b, that is based on previous work on authors such as Prescott (1972), Taylor (1974) and Kiefer (1989). Cosimano discussed his perturbation method applied in the neighborhood of the augmented linear regulator problem (see Cosimano (2008) and Cosimano andGapen (2005b, 2005a) which draws on work by Hansen and Sargent (2001, 2008.…”