Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-23T05:15:18.907Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL MONETARY POLICY UNDER PARAMETER UNCERTAINTY IN A SIMPLE MICROFOUNDED MODEL

Published online by Cambridge University Press:  10 February 2010

Takushi Kurozumi
Takushi Kurozumi*
Affiliation:
Bank of Japan
*
Address correspondence to: Takushi Kurozumi, Bank of Japan, Tokyo 103-8660, Japan; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines optimal monetary policy under uncertainty about fundamental parameters of a dynamic stochastic general-equilibrium model. In contrast to previous studies, a microfoundation of the model leads this uncertainty to generate uncertainty not only about the transmission of monetary policy but also about the transmission of shocks and about a social welfare loss function. In the presence of such uncertainty, this paper finds conditions under which optimal discretionary policy responds to shocks more aggressively than in the absence of the uncertainty. These conditions depend crucially on the persistence of shocks and the magnitude of policy multipliers. To obtain the conditions, taking proper account of uncertainty about the transmission of shocks and about the welfare loss function is of crucial importance.

Keywords

Optimal Monetary PolicyParameter UncertaintyMicrofoundation
Type
Notes
Information
Macroeconomic Dynamics , Volume 14 , Issue 2 , April 2010 , pp. 257 - 268
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Amano, Robert (2007) Inflation persistence and monetary policy: A simple result. Economics Letters 94, 26–31.Google Scholar
Angeloni, Ignazio, Coenen, Günter, and Smets, Frank (2003) Persistence, the transmission mechanism and robust monetary policy. Scottish Journal of Political Economy 50, 527–549.Google Scholar
Bils, Mark and Klenow, Peter J. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112, 947–985.Google Scholar
Blinder, Alan S. (1998) Central Banking in Theory and Practice. Cambridge, MA: MIT Press.Google Scholar
Brainard, William C. (1967) Uncertainty and the effectiveness of policy. American Economic Review 57, 411–425.Google Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–398.Google Scholar
Chow, Gregory C. (1975) Analysis and Control of Dynamic Economic Systems. New York: Wiley.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.Google Scholar
Clarida, Richard, Galí, Jordi, and Gertler, Mark (1999) The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37, 1661–1707.Google Scholar
Clarida, Richard, Galí, Jordi, and Gertler, Mark (2001) Optimal monetary policy in open versus closed economies: An integrated approach. American Economic Review 91, 253–257.Google Scholar
Craine, Roger (1979) Optimal monetary policy with uncertainty. Journal of Economic Dynamics and Control 1, 59–83.Google Scholar
Eichenbaum, Martin and Fisher, Jonas D.M. (2004) Evaluating the Calvo model of sticky prices. NBER working paper 10617.Google Scholar
Estrella, Arturo and Mishkin, Frederic S. (1999) Rethinking the role of NAIRU in monetary policy: Implications of model formulation and uncertainty. In Taylor, John B. (ed.), Monetary Policy Rules, pp. 405–430. Chicago: University of Chicago Press.Google Scholar
Galí, Jordi and Gertler, Mark (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.Google Scholar
Giannoni, Marc P. (2002) Does model uncertainty justify caution? Robust optimal monetary policy in a forward-looking model. Macroeconomic Dynamics 6, 111–144.Google Scholar
Giannoni, Marc P. (2007) Robust optimal policy in a forward-looking model with parameter and shock uncertainty. Journal of Applied Econometrics 22, 179–213.Google Scholar
Gilboa, Itzhak and Schmeidler, David (1989) Maxmin expected utility with non-unique prior. Journal of Mathematical Economics 18, 141–153.Google Scholar
Kimura, Takeshi and Kurozumi, Takushi (2007) Optimal monetary policy in a micro-founded model with parameter uncertainty. Journal of Economic Dynamics and Control 31, 399–431.Google Scholar
Leitemo, Kai (2007) The optimal perception of inflation persistence is zero. Scandinavian Journal of Economics 1, 107–113.Google Scholar
Levin, Andrew T., Onatski, Alexei, Williams, Noah, and Williams, John C. (2006) Monetary policy under uncertainty in microfounded macroeconometric models. In Gertler, Mark and Rogoff, Kenneth (eds.), NBER Macroeconomics Annual 2005, pp. 297–346. Cambridge, MA: MIT Press.Google Scholar
Levin, Andrew T. and Williams, John C. (2003) Parameter Uncertainty and the Central Bank's Objective Function. Mimeo.Google Scholar
McCallum, Bennett T. and Nelson, Edward (1999) Performance of operational policy rules in an estimated semi-classical model. In Taylor, John B. (ed.), Monetary Policy Rules, pp. 15–45. Chicago: University of Chicago Press.Google Scholar
Onatski, Alexei (2000) Minimax Monetary Policy: Comparison to Bayesian Approach, Worst Cases, and Exact minimax Rules. Mimeo.Google Scholar
Onatski, Alexei and Stock, James H. (2002) Robust monetary policy under model uncertainty in a small model of the U.S. economy. Macroeconomic Dynamics 6, 85–110.Google Scholar
Onatski, Alexei and Williams, Noah (2003) Modeling model uncertainty. Journal of the European Economic Association 1, 1087–1122.Google Scholar
Rotemberg, Julio J. and Woodford, Michael (1997) An optimization-based econometric framework for the evaluation of monetary policy. In Bernanke, Ben S. and Rotemberg, Julio J. (eds.), NBER Macroeconomics Annual 1997, pp. 297–346. Cambridge, MA: MIT Press.Google Scholar
Rudebusch, Glenn D. (2001) Is the Fed too timid? Monetary policy in an uncertain world. Review of Economics and Statistics 83, 203–217.Google Scholar
Sack, Brian (2000) Does the Fed act gradually? A VAR analysis. Journal of Monetary Economics 46, 229–256.Google Scholar
Söderström, Ulf (2002) Monetary policy with uncertain parameters. Scandinavian Journal of Economics 104, 125–145.Google Scholar
Stock, James H. (1999) Comment. In Taylor, John B. (ed.), Monetary Policy Rules, pp. 253–259. Chicago: University of Chicago Press.Google Scholar
Svensson, Lars E.O. (1999) Inflation targeting: Some extensions. Scandinavian Journal of Economics 101, 337–361.Google Scholar
Tetlow, Robert J. and von zur Muehlen, Peter (2001) Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy? Journal of Economic Dynamics and Control 25, 911–949.Google Scholar
Walsh, Carl E. (2005) Endogenous objectives and the evaluation of targeting rules for monetary policy. Journal of Monetary Economics, 52, 889–911.Google Scholar
Wieland, Volker (2003) Monetary policy and uncertainty about the natural unemployment rate. CEPR discussion paper 3811.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar