Posted
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March 28, 2011 08:51:56 PM |
Date
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2011-03 |
Author
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Timothy Cogley, Bianca de Paoli, Christian Matthes, Nikolov Kalin, and Tony Yates |
Affiliation
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New York University, Bank of England, Universitat Pompeu Fabra, European Central Bank, and Bank of England |
Title
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A Bayesian approach to optimal monetary policy with parameter and model uncertainty |
Summary / Abstract
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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
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Monetary policy models, model and parameter uncertainty, backward and forward Looking representations, Bayesian analysis and estimation |
URL
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http://www.bankofengland.co.uk/publications/workingpapers/wp414.pdf
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See
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