Welfare-maximizing monetary policy  under parameter uncertainty
By: Rochelle M. Edge, Thomas Laubach, John C. Williams
Contributors: Laubach, Thomas, 1965-; Williams, John C. (John Carroll); Federal Reserve Bank of San Francisco
Series: FRBSF working paper -- 2007-11; FRBSF working paper (Online) -- #2007-11.
Publisher: Federal Reserve Bank of San Francisco
Published: 2007
Place of publication: San Francisco]
Language: eng
Format: [electronic resource] /
Description: This paper examines welfare-maximizing monetary policy in an estimated micro-founded  general equilibrium model of the U.S. economy where the policymaker faces uncertainty  about model parameters. Uncertainty about parameters describing preferences  and technology implies not only uncertainty about the dynamics of the economy. It  also implies uncertainty about the model's utility-based welfare criterion and about the  economy's natural rate measures of interest and output. We analyze the characteristics  and performance of alternative monetary policy rules given the estimated uncertainty  regarding parameter estimates. We find that the natural rates of interest and output  are imprecisely estimated. We then show that, relative to the case of known parameters,  optimal policy under parameter uncertainty responds less to natural-rate terms  and more to other variables, such as price and wage inflation and measures of tightness  or slack that do not depend on natural rates.
Notes: Title from PDF file (viewed on Sept. 13, 2007).

"April 2007."

Includes bibliographical references.

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