Does Uncertainty Make a Time-Varying Natural Rate of Interest Irrelevant for the Conduct of Monetary Policy?

63 Pages Posted: 10 Oct 2010

See all articles by Jean-Stéphane Mésonnier

Jean-Stéphane Mésonnier

affiliation not provided to SSRN

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: September 1, 2007

Abstract

We compute optimized monetary policy rules for the ECB when the euro area economy is described by a small empirical macroeconomic model with a time-varying natural interest rate which is positively correlated with fluctuations in trend output growth. We investigate the consequences of both measurement uncertainty with respect to unobservable variables and uncertainty about key model parameters. An optimized Taylor rule with time-varying neutral rate appears to perform well compared to the unconstrained optimal policy, and better than other simple rules found in the literature, even when it is penalized by taking into account both types of uncertainty.

Keywords: Monetary policy rules, Natural rate of interest, Uncertainty

JEL Classification: E52, E37

Suggested Citation

Mésonnier, Jean-Stéphane and Renne, Jean-Paul, Does Uncertainty Make a Time-Varying Natural Rate of Interest Irrelevant for the Conduct of Monetary Policy? (September 1, 2007). Banque de France Working Paper No. 175, Available at SSRN: https://ssrn.com/abstract=1689470 or http://dx.doi.org/10.2139/ssrn.1689470

Jean-Stéphane Mésonnier (Contact Author)

affiliation not provided to SSRN ( email )

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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