Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed

39 Pages Posted: 12 Dec 2001

See all articles by Paolo Surico

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Efrem Castelnuovo

University of Melbourne - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

Monetary policy in the US is characterized by a substantial degree of inertia. While in principle this may well be the outcome of an optimizing central bank behavior, the ability of any derived policy rule to match the data relies on so large weights for interest rate smoothing into policy makers' preferences as to be theoretically flawed. In this paper we investigate whether such a puzzle can be interpreted as resulting from the concern of monetary authorities for potential misspecifications of the macroeconomic dynamics. Accordingly, we propose a novel thick modeling approach that incorporates model uncertainty into the identification of central bank's preferences. The thick robust policy rule shows the kind of smoothness observed in the data without resorting to 'incredible' values for the preference parameters.

Keywords: Model uncertainty, interest rate smoothing, Fed policy preferences, optimal monetary policy

JEL Classification: C61, E52, E58

Suggested Citation

Surico, Paolo and Castelnuovo, Efrem, Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed (October 2001). FEEM Working Paper No. 89.2001. Available at SSRN: https://ssrn.com/abstract=293659 or http://dx.doi.org/10.2139/ssrn.293659

Paolo Surico (Contact Author)

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Efrem Castelnuovo

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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