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Risk Management in Action. Robust monetary policy rules under structured uncertainty.

Levine, P, McAdam, P, Pearlman, JG and Pierse, R Risk Management in Action. Robust monetary policy rules under structured uncertainty. .

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Abstract

Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary- policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policy-maker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast- based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58

Item Type: Other
Authors :
NameEmailORCID
Levine, Pp.levine@surrey.ac.ukUNSPECIFIED
McAdam, PUNSPECIFIEDUNSPECIFIED
Pearlman, JGUNSPECIFIEDUNSPECIFIED
Pierse, RUNSPECIFIEDUNSPECIFIED
Uncontrolled Keywords : Interest-rate rules, Robustness, structured uncertainty
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:14
Last Modified : 17 May 2017 14:33
URI: http://epubs.surrey.ac.uk/id/eprint/818214

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