Should Uncertain Monetary Policy-Makers Do Less?

Martin, Benjamin T.; Salmon, Chris

doi:10.2139/ssrn.179669

Cited by 19 publications

(12 citation statements)

References 10 publications

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“…where Ó ij AB is the covariance matrix of the ith row of A t1 with the jth row of B t1 , that is, 22 See Sack (2000) and So Èderstro Èm (2000) for the U.S., Martin and Salmon (1999) for the U.K., and Shuetrim and Thompson (1999) for Australia.…”

Section: Appendix Solving the Control Problemmentioning

confidence: 99%

Monetary Policy with Uncertain Parameters

Söderström

2002

Scandinavian J Economics

170

119

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This paper shows thatÐin contrast to the received wisdomÐuncertainty about the parameters in a dynamic macroeconomic model may lead to more aggressive monetary policy. In particular, when there is uncertainty about the persistence of in¯ation, it may be optimal for the central bank to respond to shocks more aggressively in order to reduce uncertainty about the future development of in¯ation. Uncertainty about other parameters, on the other hand, dampens the policy response.

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Section: Appendix Solving the Control Problemmentioning

confidence: 99%

Monetary Policy with Uncertain Parameters

Söderström

2002

Scandinavian J Economics

170

119

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“…Model-based simulation studies generally confirm the practical importance of the Brainard effect (see Ha, 2000;Martin and Salmon, 1999;Sack, 2000). The optimal interest rate rule calls for more gradual adjustment in the presence of parameter uncertainty.…”

Section: Uncertainty and Optimal Policy Rulesmentioning

confidence: 76%

Monetary Policy under Flexible Exchange Rates: An Introduction to Inflation Targeting

Agénor¹

1999

Policy Research Working Papers

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“…Researchers have for instance considered uncertainty about the parameters of the model and have used Bayesian methods to determine the policy that minimizes the expected loss, given a prior distribution on the parameters. This approach, initially started by Brainard (1967) and developed by Chow (1975) has more recently been followed by Clarida et al (1999), Wieland (1998), Estrella and Mishkin (1999), Hall et al (1999), Martin and Salmon (1999), Svensson (1999), Sack (2000), Rudebusch (2001), Söderström (2000Söderström ( , 2002, and Kurozumi (2003) among others. Most of these studies focus on backward-looking models, and support Brainard's popular result that optimal policy should be less aggressive in the face of parameter uncertainty.…”

Section: Related Literaturementioning

confidence: 99%

Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty

Giannoni

2006

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This paper characterizes a robust optimal policy rule in a simple forward-looking model, when the policymaker faces uncertainty about model parameters and shock processes. We show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty. Thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations. However uncertainty may amplify the degree of "super-inertia" required by optimal monetary policy. We finally discuss the sensitivity of the results to alternative assumptions.

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Should Uncertain Monetary Policy-Makers Do Less?

Cited by 19 publications

References 10 publications

Monetary Policy with Uncertain Parameters

Monetary Policy with Uncertain Parameters

Monetary Policy under Flexible Exchange Rates: An Introduction to Inflation Targeting

Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty

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