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Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom

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Simon Hall
Chris Salmon
Tony Yates
Nicoletta Batini

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Abstract

This paper reports an investigation of the effects of additive and multiplicative uncertainty upon the stabilisation properties of a simple base money rule for monetary policy. Using a five-equation empirical model of the United Kingdom, it is shown that changes in the extent of additive uncertainty have no effect on the 'optimal' degree of policy responsiveness to shocks to the economy. However, it is found that policy-makers should respond by less to shocks in the face of multiplicative uncertainty, and, as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard's (1967) theoretical analysis and could be interpreted as justifying a gradualist monetary policy.

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Paper provided by Bank of England in its series Bank of England working papers with number 96.

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Handle: RePEc:boe:boeewp:96

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  5. Bennett T. McCallum, 1996. "Monetary Policy Rules and Financial Stability," NBER Working Papers 4692, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Chadha J. & Schellekens Ph., 1999. "Monetary policy loss functions: two cheers for the quadratic," Working Papers 1999002, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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  9. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier. [Downloadable!] (restricted)
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  17. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
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  19. Volker Wieland, 1998. "Monetary policy and uncertainty about the natural unemployment rate," Finance and Economics Discussion Series 1998-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  20. Bennett T. McCallum, 1991. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-39, May.
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  23. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Katerina Smidkova, 2003. "Targeting inflation under uncertainty: Policy makers' perspective," Research and Policy Notes 2003/02, Czech National Bank, Research Department. [Downloadable!]
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  2. Takeshi Kimura & Takushi Kurozumi, 2003. "Optimal monetary policy in a micro-founded model with parameter uncertainty," Finance and Economics Discussion Series 2003-67, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, EconWPA. [Downloadable!]
  4. Robert Tetlow & Peter von zur Muehlen, 2004. "Avoiding Nash Inflation: Bayesian and Robus Responses to Model Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 869-899, October. [Downloadable!] (restricted)
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  5. Lavan Mahadeva & Gabriel Sterne, . "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England. [Downloadable!]
  6. Marc P. Giannoni, 2007. "Robust optimal monetary policy in a forward-looking model with parameter and shock uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 179-213. [Downloadable!]
  7. Ben Martin & Chris Salmon, . "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England. [Downloadable!]
  8. Marc Giannoni, 2006. "Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty," NBER Working Papers 11942, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile. [Downloadable!]
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