Complexity and monetary policy : [Version August 10, 2012]

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper 
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
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Metadaten
Author:Athanasios Orphanides, Volker Wieland
URN:urn:nbn:de:hebis:30:3-272544
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2012,11
Series (Serial Number):CFS working paper series (2012, 11)
Publisher:CFS
Place of publication:Frankfurt, Main
Document Type:Working Paper
Language:English
Year of Completion:2012
Year of first Publication:2012
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2012/10/18
Tag:Complexity; ECB; Financial Crisis; Model Uncertainty; Monetary Policy; Robust Simple Rules
Issue:Version August 10, 2012
Pagenumber:45
Institutes:Wirtschaftswissenschaften
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E50 General
E52 Monetary Policy
E58 Central Banks and Their Policies
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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