Monetary Policy Under Uncertainty
This paper studies the design of optimal monetary policy under uncertainty using a Markov jump-linear-quadratic (MJLQ) approach. To approximate the uncertainty that policymakers face, the authors use different discrete modes in a Markov chain and take mode-dependent linear-quadratic approximations of the underlying model.
Monetary policy analysts often rely on rules of thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy with historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations.
This paper estimates a Bayesian vector autoregression for the U.S. economy that includes a housing sector and addresses the following questions: Can developments in the housing sector be explained on the basis of developments in real and nominal gross domestic product and interest rates? What are the effects of housing demand shocks on the economy? How does monetary policy affect the housing market? What are the implications of house price developments for the stance of monetary policy?
This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the federal funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target.
John B. Taylor, "The Importance of Being Predictable"
Ben S. Bernanke, "Monetary Policy Under Uncertainty"
William Poole, "The Importance of Being Predictable"
By providing guidance about future economic developments, central banks can affect private sector expectations and decisions. This can improve welfare by reducing private sector forecast errors, but it can also magnify the impact of noise in central bank forecasts.
This article was originally published in the Board of Governors of the Federal Reserve System Open Market Policies and Operating Procedures—Staff Studies, July 1971. It is reprinted here as an addendum to these conference proceedings.