Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 35, Issue 12, Pages 2186-2212Publisher
ELSEVIER
DOI: 10.1016/j.jedc.2011.02.006
Keywords
Monetary policy; Bayesian analysis; Statistical decision theory; Quantitative policy modeling
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Funding
- Economic and Social Research Council [ES/H02123X/1] Funding Source: researchfish
- ESRC [ES/H02123X/1] Funding Source: UKRI
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This paper undertakes a Bayesian analysis of optimal monetary policy for the U.K. We estimate a suite of monetary-policy models that include both forward- and backward-looking representations as well as large- and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimized for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimized for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilization in forward-looking models. (C) 2011 The Bank of England. Published by Elsevier B.V. All rights reserved.
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