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

Timothy Cogley, Bianca De Paoli, Christian Matthes, Kalin Nikolov*, Tony Yates

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

13 Citations (Scopus)

Abstract

This paper undertakes a Bayesian analysis of optimal monetary policy for the U.K. 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 optimized for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimized 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 stabilization in forward-looking models. (C) 2011 The Bank of England. Published by Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)2186-2212
Number of pages27
JournalJournal of Economic Dynamics and Control
Volume35
Issue number12
DOIs
Publication statusPublished - Dec 2011
EventConference on Frontiers in Structural Macroeconomic Modeling - Tokyo, Japan
Duration: 23 Jan 201024 Jan 2010

Keywords

  • Monetary policy
  • Bayesian analysis
  • Statistical decision theory
  • Quantitative policy modeling
  • INFLATION PERSISTENCE
  • DSGE MODELS
  • EXPERIMENTATION
  • ROBUSTNESS

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