Optimal Policy and Taylor Rule Cross-Checking Under Parameter Uncertainty

SAFE Working Paper No. 30

35 Pages Posted: 5 Sep 2013 Last revised: 24 Feb 2018

See all articles by Dirk Bursian

Dirk Bursian

Goethe University Frankfurt; Deutsche Bundesbank

Markus Roth

Deutsche Bundesbank

Date Written: September 26, 2013

Abstract

We examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way.

Keywords: Optimal monetary policy, parameter uncertainty, Taylor rule

JEL Classification: E47, E52, E58

Suggested Citation

Bursian, Dirk and Roth, Markus, Optimal Policy and Taylor Rule Cross-Checking Under Parameter Uncertainty (September 26, 2013). SAFE Working Paper No. 30. Available at SSRN: https://ssrn.com/abstract=2320426 or http://dx.doi.org/10.2139/ssrn.2320426

Dirk Bursian (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt/Main, 60323
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Markus Roth

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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