Posted

March 28, 2011 08:51:56 PM

Date

2011-03

Author

Timothy Cogley, Bianca de Paoli, Christian Matthes, Nikolov Kalin, and Tony Yates

Affiliation

New York University, Bank of England, Universitat Pompeu Fabra, European Central Bank, and Bank of England

Title

A Bayesian approach to optimal monetary policy with parameter and model uncertainty

Summary /
Abstract

This paper undertakes a Bayesian analysis of optimal monetary policy for the United Kingdom. We estimate a suite of monetary policy models that include both forward and backward-looking representations as well as large and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimised for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimised for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilisation in forward-looking models.

Keywords

Monetary policy models, model and parameter uncertainty, backward and forward Looking representations, Bayesian analysis and estimation

URL

http://www.bankofengland.co.uk/publications/workingpapers/wp414.pdf

See

More articles ...