Fundamental Uncertainty About the Natural Rate of Interest: Info-Gap As Guide for Monetary Policy

34 Pages Posted: 4 Sep 2019

See all articles by Yakov Ben-Haim

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering

Jan Willem van den End

De Nederlandsche Bank

Date Written: August 29, 2019

Abstract

In this paper we assume that the natural rate of interest is fundamentally uncertain. Based on a small scale macroeconomic model, info-gap theory is used to rank different monetary policy strategies in terms of their robustness against this uncertainty. Applied to the euro area, we find that a strategy that is responsive to deviations from the policy targets is more robust against natural rate uncertainty than the historical response of the ECB as reflected in an estimated Taylor rule. An inert or passive monetary strategy is least robust. Our analysis presents a methodology that is applicable in a wide range of policy analyses under deep uncertainty.

Keywords: Monetary Policy, Monetary Strategy, Knightian uncertainty, info-gaps, satisficing

JEL Classification: E42, E47, E52

Suggested Citation

Ben-Haim, Yakov and van den End, Jan Willem, Fundamental Uncertainty About the Natural Rate of Interest: Info-Gap As Guide for Monetary Policy (August 29, 2019). De Nederlandsche Bank Working Paper No. 650, August 2019, Available at SSRN: https://ssrn.com/abstract=3447266 or http://dx.doi.org/10.2139/ssrn.3447266

Yakov Ben-Haim (Contact Author)

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

Technion City
Haifa 32000, Haifa 32000
Israel

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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