Monetary policy rules. model uncertainty meets design limits

Research Area: Macroeconomics, Monetary Policy
Researcher: Alexander Dück,
Fabio Verona
Date: 1.2.2023
Abstract:

Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In their proposed approach, the authors take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, their results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.

(A former version of this paper is entitled: Robust frequency-based monetary policy rules)

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