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Optimal policy and Taylor rule cross-checking under parameter uncertainty

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Published/Copyright: February 27, 2014

Abstract

We examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way.


Corresponding author: Markus Roth, Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt/Main, Germany, e-mail:

Acknowledgements

We thank Pooyan Amir Ahmadi, Ester Faia, Mickel Neves, Mirko Wiederholt, the editor Arpad Abraham, two anonymous referees, and participants of the 2012 Annual Congress of the German Economic Association. All errors are ours. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank.

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Published Online: 2014-2-27
Published in Print: 2014-1-1

©2014 by De Gruyter

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