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MONETARY POLICY WITH A WIDER INFORMATION SET: A BAYESIAN MODEL AVERAGING APPROACH
Author(s) -
Milani Fabio
Publication year - 2008
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2008.00446.x
Subject(s) - exploit , economics , monetary policy , econometrics , bayesian probability , context (archaeology) , smoothing , conservatism , set (abstract data type) , markov chain , interest rate , computer science , macroeconomics , machine learning , paleontology , computer security , artificial intelligence , biology , politics , political science , law , computer vision , programming language
Monetary policy has been usually analyzed in the context of small macroeconomic models where central banks are allowed to exploit a limited amount of information. Under these frameworks, researchers typically derive the optimality of aggressive monetary rules, contrasting with the observed policy conservatism and interest rate smoothing. This paper allows the central bank to exploit a wider information set, while taking into account the associated model uncertainty, by employing Bayesian model averaging with Markov chain model composition. In this enriched environment, we derive the optimality of smoother and more cautious policy rates, together with clear gains in macroeconomic efficiency.