Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152974
Authors: 
Moessner, Richhild
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 540
Abstract: 
This paper studies optimal discretionary policy with parameter uncertainty about inflation inertia. Optimal policy rules and impulse responses are presented within a hybrid New-Keynesian model estimated for the euro area by Smets (2003). We find that it may be optimal for policy to respond more aggressively to cost-push shocks and real interest rate shocks in the presence of uncertainty about inflation inertia, depending on the form of the central bank’s objective function. Moreover, in the cases where optimal policy is not certainty equivalent, we find that inflation returns slightly more gradually to equilibrium following a shock when the degree of inflation inertia is uncertain.
Subjects: 
Inflation persistence
monetary policy
uncertainty
JEL: 
E52
E58
Document Type: 
Working Paper

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