SSE/EFI Working Paper Series in Economics and Finance
Should central banks be more aggressive?
Abstract: Simple models of monetary policy often imply optimal
policy behavior that is considerably more aggressive than what is commonly
observed. This paper argues that such counterfactual implications are due
to model restrictions and a failure to account for multiplicative parameter
uncertainty, rather than to policymakers being too cautious in their
implementation of policy. Comparing a restricted and an unrestricted
version of the same empirical model, the unrestricted version leads to less
volatility in optimal policy, and, taking parameter uncertainty into
account, to policy paths very close to actual Federal Reserve policy.
Keywords: Optimal monetary policy; parameter uncertainty; interest rate smoothing.; (follow links to similar papers)
JEL-Codes: E52; E58; (follow links to similar papers)
31 pages, March 8, 1999
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