Optimal Monetary Policy in a Micro-founded Model with Parameter Uncertainty
| Author | : Takeshi Kimura |
| Publisher | : |
| Total Pages | : 70 |
| Release | : 2003 |
| Genre | : Monetary policy |
| ISBN | : |
Optimal Monetary Policy In A Micro Founded Model With Parameter Uncertainty
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Welfare-maximizing Monetary Policy Under Parameter Uncertainty
| Author | : Rochelle Mary Edge |
| Publisher | : |
| Total Pages | : 78 |
| Release | : 2007 |
| Genre | : Monetary policy |
| ISBN | : |
This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies not only uncertainty about the dynamics of the economy. It also implies uncertainty about the model's utility-based welfare criterion and about the economy's natural rate measures of interest and output. We analyze the characteristics and performance of alternative monetary policy rules given the estimated uncertainty regarding parameter estimates. We find that the natural rates of interest and output are imprecisely estimated. We then show that, relative to the case of known parameters, optimal policy under parameter uncertainty responds less to natural-rate terms and more to other variables, such as price and wage inflation and measures of tightness or slack that do not depend on natural rates.
Optimal Policy Under Model Uncertainty
| Author | : |
| Publisher | : |
| Total Pages | : |
| Release | : 2007 |
| Genre | : |
| ISBN | : |
In this paper we propose a novel methodology to analyze optimal policies under model uncertainty in micro-founded macroeconomic models. As an application we assess the relevant sources of uncertainty for the optimal conduct of monetary policy within (parameter uncertainty) and across models (specification uncertainty) using EU 13 data. Parameter uncertainty matters only if the zero bound on interest rates is explicitly taken into account. In any case, optimal monetary policy is highly sensitive with respect to specification uncertainty implying substantial welfare gains of a robust-optimal rule that incorporates this risk. -- Optimal monetary policy ; model uncertainty ; Bayesian model estimation
Robust Optimal Policy in a Forward-looking Model with Parameter and Shock Uncertainty
| Author | : Marc Paolo Giannoni |
| Publisher | : |
| Total Pages | : 52 |
| Release | : 2006 |
| Genre | : Monetary policy |
| ISBN | : |
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.
Designing a Simple Loss Function for Central Banks
| Author | : Davide Debortoli |
| Publisher | : International Monetary Fund |
| Total Pages | : 56 |
| Release | : 2017-07-21 |
| Genre | : Business & Economics |
| ISBN | : 1484311752 |
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models
| Author | : Andrew T. Levin |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2007 |
| Genre | : |
| ISBN | : |
We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
Optimal Monetary Policy Under Bounded Rationality
| Author | : Jonathan Benchimol |
| Publisher | : International Monetary Fund |
| Total Pages | : 52 |
| Release | : 2019-08-02 |
| Genre | : Business & Economics |
| ISBN | : 1498324584 |
The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.
