Search Results
Working Paper
Data uncertainty and the role of money as an information variable for monetary policy
This paper demonstrates that money can play an important role as an information variable and may result in major improvements in current output estimates. However, the specific nature of this role depends on the magnitude of the output measurement error relative to the money demand shock. In particular, we find noticeable but small improvements in output estimates due to the inclusion of money growth in the information set. Money plays a quantitatively more important role with regard to output estimation if we allow for a contribution of monetary analysis in reducing uncertainty due to money ...
Working Paper
The performance of forecast-based monetary policy rules under model uncertainty
We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty: such rules respond to the one-year ahead inflation forecast and to the current output gap, and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. In light of these results, we identify a robust benchmark rule that performs very well in all five ...
Working Paper
Learning by doing and the value of optimal experimentation
Research on learning-by-doing has typically been restricted to cases where estimation and control can be treated separately. Recent work has provided convergence results for more general learning problems where experimentation is an important aspect of optimal control. However the associated optimal policy cannot be derived analytically because Bayesian learning introduces a nonlinearity in the dynamic programming problem. This paper characterizes the optimal policy numerically and shows that it incorporates a substantial degree of experimentation. Dynamic simulations indicate that optimal ...
Working Paper
Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence
The Federal Reserve and other central banks tend to change short-term interest rates in sequences of small steps in the same direction and reverse the direction of interest rate movements only infrequently. These characteristics, often referred to as interest-rate smoothing, have led to criticism that policy responds too little and too late to macroeconomic developments, suggesting to some observers that the Federal Reserve has an objective of minimizing interest-rate volatility. This paper, however, argues that the observed degree of interest-rate smoothing may well represent optimal ...
Working Paper
Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero
This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound constraint on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are very non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the ...
Working Paper
Robustness of simple monetary policy rules under model uncertainty
In this paper, we investigate the properties of alternative monetary policy rules using four structural macroeconometric models: the Fuhrer-Moore model, Taylor's Multi-Country Model, the MSR model of Orphanides and Wieland, and the FRB staff model. All four models incorporate the assumptions of rational expectations, short-run nominal inertia, and long-run monetary neutrality, but differ in many other respects (e.g., the dynamics of prices and real expenditures). We compute the output-inflation volatility frontier of each model for alternative specifications of the interest rate rule, subject ...
Working Paper
Monetary policy and uncertainty about the natural unemployment rate
This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and ...
Conference Paper
Certainty equivalence - discussion
Working Paper
Insurance policies for monetary policy in the euro area
In this paper, the authors aim to design a monetary policy for the euro area that is robust to the high degree of model uncertainty at the start of monetary union and allows for learning about model probabilities. To this end, they compare and ultimately combine Bayesian and worst-case analysis using four reference models estimated with pre-EMU synthetic data. The authors start by computing the cost of insurance against model uncertainty, that is, the relative performance of worst-case or minimax policy versus Bayesian policy. While maximum insurance comes at moderate costs, they highlight ...
Journal Article
Economic projections and rules of thumb for monetary policy
Monetary policy analysts often rely on rules of thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy with historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules of thumb should draw on policymakers' forecasts of key variables, such as inflation and unemployment, or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor ...