Introduction

Outline

Robust Monetary Policy: An Overview Ulf S¨oderstr¨om IGIER, Bocconi University

November 2006

Robust Monetary Policy: An Overview

References

Introduction

Outline

References

Introduction I

Central banks face enormous amounts of uncertainty

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Greenspan (2003): Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.

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Sources of uncertainty I I I

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Data Model specification Parameters

How take this uncertainty into account when setting monetary policy?

Robust Monetary Policy: An Overview

Introduction

Outline

References

A very brief history of robustness

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Friedman (1960, 1968) I I I

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“long and variable lags” Avoid fine-tuning monetary policy k% rule robust

McCallum (1988) I I

Countercyclical policy possible Make sure rule is robust across alternative model specifications

Robust Monetary Policy: An Overview

Introduction

Outline

References

These lectures

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Optimal monetary policy with uncertainty

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How to design robust policy

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CB faces uncertainty and tries to design robust policy Private sector knows true model and understands the central bank’s policy

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No learning or experimentation

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Ad hoc quadratic loss function

Robust Monetary Policy: An Overview

Introduction

Outline

Outline

1. Theory: Different approaches in simple model I I I

Shock uncertainty: Certainty equivalence Parameter uncertainty Unspecified (Knightian) model uncertainty

2. Applications I I I

Robust rules with model and parameter uncertainty Data uncertainty Unspecified model uncertainty

Robust Monetary Policy: An Overview

References

Introduction

Outline

References

References

Friedman, Milton (1960), A Program for Monetary Stability , Fordham University Press, New York. ——— (1968), “The role of monetary policy,” American Economic Review , 58 (1), 1–17. Greenspan, Alan (2003), “Monetary policy under uncertainty,” Opening remarks at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. McCallum, Bennett T. (1988), “Robustness properties of a rule for monetary policy,” Carnegie-Rochester Conference Series on Public Policy , 29, 173–203.

Robust Monetary Policy: An Overview