Robust monetary policy with imperfect knowledge

Robust monetary policy with imperfect knowled ...
Athanasios Orphanides, Athanas ...
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Last edited by MARC Bot
December 19, 2020 | History

Robust monetary policy with imperfect knowledge

We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates.

Publish Date
Language
English

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Edition Availability
Cover of: Robust monetary policy with imperfect knowledge
Robust monetary policy with imperfect knowledge
2007, Federal Reserve Bank of San Francisco
electronic resource / in English
Cover of: Robust monetary policy with imperfect knowledge
Robust monetary policy with imperfect knowledge
2007, European Central Bank
in English

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Book Details


Edition Notes

Title from PDF file (viewed on Sept. 13, 2007).

"March 2007."

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.

Published in
San Francisco]
Series
FRBSF working paper -- 2007-08, FRBSF working paper (Online) -- #2007-08.

Classifications

Library of Congress
HB1

The Physical Object

Format
[electronic resource] /

ID Numbers

Open Library
OL31800198M
LCCN
2007615346

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