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Monetary Policy with Uncertain Parameters
Author(s) -
Söderström Ulf
Publication year - 2002
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00275
Subject(s) - economics , monetary policy , inflation (cosmology) , order (exchange) , inflation targeting , monetary economics , persistence (discontinuity) , macroeconomics , econometrics , finance , physics , theoretical physics , geotechnical engineering , engineering
This paper shows that—in contrast to the received wisdom—uncertainty about the parameters in a dynamic macroeconomic model may lead to more aggressive monetary policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond to shocks more aggressively in order to reduce uncertainty about the future development of inflation. Uncertainty about other parameters, on the other hand, dampens the policy response. JEL classification : E 43; E 52