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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

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.

Suggested Citation

  • Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, 1999. "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England.
    • Handle: RePEc:boe:boeewp:96
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1999/wp96.pdf
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    References listed on IDEAS

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    Cited by:

    1. Katerina Smidkova, 2003. "Targeting Inflation under Uncertainty: Policy Makers' Perspective," Research and Policy Notes 2003/02, Czech National Bank.
    2. Lavan Mahadeva & Gabriel Sterne, 2002. "The role of short-run inflation targets and forecasts in disinflation," Bank of England working papers 167, Bank of England.
    3. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
    4. Felipe Morandé Lavín & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers wp285, University of Chile, Department of Economics.
    5. Man-Keung Tang & Mr. Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 2011/209, International Monetary Fund.
    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.
    7. Weitzman Nagar, 2007. "Asymmetry in Monetary Policy: An Asymmetric Objective Function and a New-Keynesian Model," Bank of Israel Working Papers 2007.02, Bank of Israel.
    8. Felipe Morandé & Mauricio Tejada, 2009. "Sources of Uncertainty in Conducting Monetary Policy in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 12, pages 451-509, Central Bank of Chile.
    9. Flamini Alessandro & Milas Costas, 2011. "Real-Time Optimal Monetary Policy with Undistinguishable Model Parameters and Shock Processes Uncertainty," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(2), pages 1-43, March.
    10. Di Bartolomeo, Giovanni & Giuli, Francesco, 2011. "Fiscal and monetary interaction under monetary policy uncertainty," European Journal of Political Economy, Elsevier, vol. 27(2), pages 369-375, June.
    11. Kimura, Takeshi & Kurozumi, Takushi, 2007. "Optimal monetary policy in a micro-founded model with parameter uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 399-431, February.
    12. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(1), pages 111-144, February.
    13. Bonomo, Marco Antonio Cesar & Brito, Ricardo D., 2002. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 56(4), October.
    14. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.
    15. Nijathaworn, Bandid & Chaikhor, Suwatchai & Chotika-arpa, Suppakorn & Sakkankosone, Suchart, 2015. "Monetary Policy and Foreign Exchange Management: Reforming Central Bank Functions in Myanmar," ADB Economics Working Paper Series 431, Asian Development Bank.
    16. 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.
    17. Ajax R. B. Moreira & Marco A. F. H. Cavalcanti, 2015. "Robustness and Stabilization Properties of Monetary Policy Rules in Brazil," Discussion Papers 0100, Instituto de Pesquisa Econômica Aplicada - IPEA.
    18. Katerina Smidkova, 2003. "Methods Available to Monetary Policy Makers to Deal with Uncertainty," Macroeconomics 0310002, University Library of Munich, Germany.
    19. 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.

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