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- Title
The Implications of Uncertainty for Monetary Policy.
- Authors
Shuetrim, Geoffrey; Thompson, Christopher
- Abstract
This paper uses a simple model of the Australian economy to empirically examine the consequences of parameter uncertainty for optimal monetary policy. Optimal policy responses are derived for a monetary authority that targets inflation and output stability. Parameter uncertainty is characterised by the estimated distribution of the model coefficient estimates. Learning is ruled out, so the monetary authority can commit to its ex ante policy response. For certain shocks, taking account of parameter uncertainty can recommend more, rather than less, activist use of the policy instrument. While this finding is specific to the model specification, parameter estimates and the shocks analysed, it contrasts with the widely held belief that the generic implication of parameter uncertainty is more conservative policy.
- Subjects
AUSTRALIA; MONETARY policy; UNCERTAINTY; PARAMETER estimation
- Publication
Economic Record, 2003, Vol 79, Issue 246, p370
- ISSN
0013-0249
- Publication type
Article
- DOI
10.1111/1475-4932.00110