Working Paper Series,
Sveriges Riksbank (Central Bank of 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, May 1, 1999

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Ulf Söderström, (2002), 'Monetary policy with uncertain parameters', Scandinavian Journal of Economics, vol 104, no 1, pages 125-145

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