Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 308: Monetary policy with uncertain parameters

Ulf Söderström ()
Additional contact information
Ulf Söderström: Research Department, Sveriges Riksbank, Postal: SE-103 37 Stockholm, Sweden

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.

JEL-codes: E43; E52

21 pages, March 8, 1999

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