area and the us ; - the differences in patterns can be ascribed to differences in size and nature of shocks. most of the differences are due to demand shocks, which were larger in the united states. a. blinder motto and rostagno ( 2005 ) and sahuc and smets monetary policy and asset prices. • caution is also an answer to the following question : should monetary policy systematically react to perceived asset prices misalignments? three factors of uncertainty come into the picture : - first, there is by essence a high degree of uncertainty surrounding the assessment of misalignments, related to their equilibrium prices and the channels of transmission to the real economy ; - second, central banks have to keep in mind the balance of risks facing the economy : a monetary policy action that would reduce the risk of a large loss in the future might be very costly for the economy in the short run ; - third, the effects of monetary policy decisions on asset prices are very uncertain. • the announcement of a systematic reaction could therefore lead to moral hazard and undermine the central bank ’ s anti - inflationist credibility, which is its most precious asset. moreover, the single interest rate policy cannot be geared simultaneously towards two potentially conflicting objectives. c. be aggressive or experiment there may be two cases where gradualism is not the systematic guideline. • worst - case outcomes may best be prevented by following policy rules that are rather aggressive in responding to inflation deviations from target. • a more aggressive policy rule may generate more information, which would improve the learning of the central bank and thereby future policy performance. but the learning process might be costly since it could generate increased volatility. 2. some approaches to address uncertainty a. rely on monetary policy rules • simple monetary policy rules ( like the taylor rule ) may perform well in many different models. another advantage of a rule - based approach is that policy becomes more predictable, which can facilitate the formation of expectations. • however, followed as a systematic process, a rule will sometimes ignore information that may be relevant for predicting future risks to price stability. a drawback of too parsimonious rules is their inability to provide a real solution to the policy problem. b. pay attention to “ tail ” events • maintaining the stability of the financial system and containing the systemic risk that may arise in financial markets is central to a central bank ’ s mission. in a market - based system, sound risk management by all market participants is essential to protect against the

. 1 ) monetary policy guidelines a. disregard uncertainty • if the uncertainty is related to data or shocks ( the so called “ additive ” uncertainty ), it may be optimal to take decisions as if there were no uncertainty at all. • in these cases, the “ certainty equivalence principle ” ( poole, 1970 ) calls for policy to respond to the best estimate of variables in the same way that it would to perfectly measured variables, were they to be observable. b. be cautious • this is an approach popularised by brainard : “ parametric ” uncertainty gives grounds for addressing economic disturbances cautiously, supporting a gradualist approach ( brainard, 1967 ). furthermore, transmission uncertainty related to the fact that, according to milton friedman, “ monetary policy works with long and variable lags ”, cautions against trying to “ fine - tune ” the economy through monetary policy intervention. • moreover, a central bank should not adjust policy simply because the market expects it 1 : - the behaviour of financial markets is mimetic whilst central banks are very cautious ; - markets are sensitive to speculative bubbles while central bankers focus on fundamentals ; - markets are short - term oriented whereas central banks are medium - to long - term oriented. • however, erroneous decisions may be made in private markets if monetary policy does not match the policy anticipated. this requires the central bank to be intertemporally consistent. a usual policy guideline in this context is to gradually adjust the policy rate. • thus, from a practical point of view, gradualism has many advantages : - it reduces the risk of having to quickly reverse policy decisions ; - it reduces the probability of financial market disruptions ; - it is particularly beneficial in the face of major risks. debate on the difference of behavior between the eurosystem and the fed. • less aggressive interest rate cuts in the euro area than in the us after 2001 and prolonged period of stable policy rates between 2003 and 2005 raised the question : is the eurosystem “ too passive ”? • activism and gradualism refer to the number and magnitude of changes in the policy rate over a given period. • research recently conducted on the basis of an estimated model for the euro area and the us over the last two decades has yielded three findings : 2 - the monetary policy strategies pursued by the eurosystem and the fed do exhibit some differences ; - the degree of interest rate smoothing, taken as an indicator of monetary policy gradualism, is quite similar in the euro