Citation:
Gerdesmeier, Dieter, Roberto Motto, and Huw Pill. 2002. “Paradigm Uncertainty and the Role of Monetary Developments in Monetary Policy Rules”. Copy at http://www.tinyurl.com/yyerxtku
 | 588_mprpaper.pdf | 323 KB |
Abstract:
When taking monetary policy decisions, central banks face considerable uncertainty about the transmission mechanism of monetary policy to the price level. In particular, the role played by monetary developments in the transmission mechanism is not well understood. Two paradigms exist: one assigns monetary developments an entirely passive role; the other gives money an active role, beyond that of an indicator variable. Taking such uncertainty as a starting point for analysis, this paper evaluates a number of monetary policy rules for short–term interest rate decisions in the face of paradigm uncertainty. It describes what constitutes an efficient rule in this context and discusses procedures leading to the adoption of such rules.