Uncertainty and Simple Monetary Policy Rules

Bank of England Working Paper No. 96

35 Pages Posted: 7 Sep 1999

See all articles by Simon Hall

Simon Hall

Bank of England

Chris Salmon

Bank of England

Anthony Yates

Bank of England - Monetary Analysis

Nicoletta Batini

International Monetary Fund (IMF)

Date Written: 1999

Abstract

This paper reports an investigation of the effects of additive and multiplicative uncertainty upon the stabilization properties of a simple base money rule for monetary policy. Using a five-equation empirical model of the United Kingdom, it is shown that changes in the extent of additive uncertainty have no effect on the "optimal" degree of policy responsiveness to shocks to the economy. However, it is found that policy-makers should respond by less to shocks in the face of multiplicative uncertainty, and, as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard's (1967) theoretical analysis and could be interpreted as justifying a gradualist monetary policy.

JEL Classification: E52, E58

Suggested Citation

Hall, Simon and Salmon, Chris and Yates, Anthony and Batini, Nicoletta, Uncertainty and Simple Monetary Policy Rules (1999). Bank of England Working Paper No. 96. Available at SSRN: https://ssrn.com/abstract=176683 or http://dx.doi.org/10.2139/ssrn.176683

Simon Hall (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Chris Salmon

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Anthony Yates

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Nicoletta Batini

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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