Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 308:
Monetary policy with uncertain parameters

Ulf Söderström ()

Abstract: In a simple dynamic macroeconomic model, it is shown that uncertainty about structural parameters does not necessarily lead to more cautious monetary policy, refining the accepted wisdom concerning the effects of parameter uncertainty on optimal policy. In particular, when there is uncertainty about the persistence of inflation, it is optimal for the central bank to respond more aggressively to shocks than if the parameter were known with certainty, since the central bank wants to avoid bad outcomes in the future. Uncertainty about other parameters, in contrast, acts to dampen the policy response.

Keywords: Optimal monetary policy; parameter uncertainty; Brainard conservatism principle; interest rate smoothing.; (follow links to similar papers)

JEL-Codes: E43; E52; (follow links to similar papers)

21 pages, March 8, 1999

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This paper is published as:
Söderström, Ulf, (2002), 'Monetary policy with uncertain parameters', Scandinavian Journal of Economics, Vol. 104, March, No. 1, pages 125-145

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