Fundamental Uncertainty and Unconventional Monetary Policy: An Info-Gap Approach

33 Pages Posted: 1 Mar 2017

See all articles by Yakov Ben-Haim

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering

Maria Demertzis

Bruegel

Jan Willem van den End

De Nederlandsche Bank

Date Written: February 23, 2017

Abstract

This paper applies the info-gap approach to the unconventional monetary policy of the Eurosystem and so takes into account the fundamental uncertainty on inflation shocks and the transmission mechanism. The outcomes show that a more demanding monetary strategy, in terms of lower tolerance for output and inflation gaps, entails less robustness against uncertainty, particularly if financial variables are taken into account. Augmenting the Taylor rule with a financial variable leads to a smaller loss of robustness than taking into account the effect of financial imbalances on the economy. However, in some situations, the augmented model is more robust than the baseline model. A conclusion from our framework is that including financial imbalances in the monetary policy objective does not necessarily increase policy robustness, and may even decrease it.

Keywords: Monetary Policy, Monetary Strategy, Knightian uncertaint, info-gaps

JEL Classification: E42, E47, E52

Suggested Citation

Ben-Haim, Yakov and Demertzis, Maria and van den End, Jan Willem, Fundamental Uncertainty and Unconventional Monetary Policy: An Info-Gap Approach (February 23, 2017). De Nederlandsche Bank Working Paper No. 544. Available at SSRN: https://ssrn.com/abstract=2925223 or http://dx.doi.org/10.2139/ssrn.2925223

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Jan Willem van den End (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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