Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty

Estrella, Arturo; Mishkin, Frederic S.

doi:10.3386/w6518

Cited by 76 publications

(99 citation statements)

References 10 publications

(21 reference statements)

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“…Preliminary results suggest that in our model this kind of uncertainty does not affect the optimal instrument rules very much (see also Estrella and Mishkin (1998)). An interesting topic for future research would be to see whether model parameter uncertainty affects the choice between using an inflation forecast and using actually observed inflation in simple instrument rules.…”

Section: Discussionmentioning

confidence: 99%

“…2 Staiger et al (1996) conjecture that "monetary policy in the presence of measurement error ... is consistent with placing less weight on poorly measured targets". More recently, however, Estrella and Mishkin (1998) conclude: "Uncertainty about the level of the NAIRU has no influence on the setting of policy instruments, although it does affect the value of the objective function. This type of uncertainty makes the policymaker worse off, but does not alter the policymakers' behaviour" (see also Wieland (1997)).…”

Section: Introductionmentioning

confidence: 99%

“…Because output gap uncertainty enters additively into the linear-quadratic framework of this paper, it does not affect the optimal linear instrument rule. Estrella and Mishkin (1998) base their conclusions on this wellknown certainty equivalence result. However, this result does not apply to restricted instrument rules such as the popular Taylor rule, which links the central bank's policy rate to only two variables, the current inflation rate and the output gap (Taylor (1993)).…”

Section: Introductionmentioning

confidence: 99%

“…See also Brayton et al (1998). 5 A number of recent papers, including Cecchetti (1998), Clarida et al (1997), Estrella and Mishkin (1998), Sack (1998), Svensson (1997) and Wieland (1998), have recently picked up Brainard's theme in the context of the literature on monetary policy rules. See also Peersman and Smets (1998) and Rudebusch (1998).…”

Section: Introductionmentioning

confidence: 99%

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Output gap uncertainty: Does it matter for the Taylor rule?

Smets¹

2002

Empirical Economics

127

128

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Fax: +41 61 / 280 91 00 and +41 61 / 280 81 00The present publication is also available on the BIS Web site (www.bis.org). This paper analyses the effect of measurement error in the output gap on efficient monetary policy rules in a simple estimated model of the US economy. While it is a well-known result that such additive uncertainty does not affect the optimal feedback rule in a linear-quadratic framework, it is shown that output gap uncertainty can have a significant effect on the efficient response coefficients in restricted instrument rules such as the popular Taylor rule. Output gap uncertainty reduces the response to the current estimated output gap relative to current inflation and may partly explain why the parameters in estimated Taylor rules are often much lower than suggested by optimal control exercises which assume the state of the economy is known. © Bank for

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Output gap uncertainty: Does it matter for the Taylor rule?

Smets¹

2002

Empirical Economics

127

128

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“…As the effects of adjustment to shocks fade away, the NAIRU will tend towards the long-run natural rate (Batini and Greenslade, 2006). 1 Estrella and Mishkin (2000) and Woodford (2002) emphasize that the short-run concept should be the main focus of monetary policy, not the long-run natural rate. This is because the variability in the short-run NAIRU contains information on future inflationary pressures that is disregarded when targeting the long-run natural rate.…”

Section: Introductionmentioning

confidence: 99%

The NAICU and the Phillips Curve - An Approach Based on Micro Data

Kberl

Lein

2008

SSRN Journal

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Monetary policy reaction to uncertainty in Japan: Evidence from a quantile‐on‐quantile interest rate rule

et al. 2020

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Japan's episodes of lower bound of interest rates together with macroeconomic uncertainty for over the past two decades stands as a tremendous hurdle for the estimation of Taylor-type rule models. We demarcate our study from previous literature by conducting the estimations not only at various points on the conditional distribution of the interest rate but also at various quantiles of an additional regressor on top of inflation and output, viz., an uncertainty measure, by adopting a quantile nonseparable triangular system estimation. The results show that the reaction to uncertainty seems to have substituted the Bank's reaction to inflation and output, lending support to the Brainard attenuation principle. In essence, faced with higher uncertainty, the monetary authority reacts by cutting (attenuating) its policy rate across all quantiles of uncertainty at all conditional quantiles of interest rate, with an increased response of the Bank of Japan to uncertainty at its lower quantiles when interest rate is at its lower conditional quantiles. A possible explanation is the greater concern of getting out from the lower bounds of interest rate.

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Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty

Cited by 76 publications

References 10 publications

Output gap uncertainty: Does it matter for the Taylor rule?

Output gap uncertainty: Does it matter for the Taylor rule?

The NAICU and the Phillips Curve - An Approach Based on Micro Data

Monetary policy reaction to uncertainty in Japan: Evidence from a quantile‐on‐quantile interest rate rule

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