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
Date Written: September 26, 2013
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: Suggested Citation