Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153073
Authors: 
Moessner, Richhild
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 639
Abstract: 
This paper studies optimal discretionary monetary policy in the presence of uncertainty about the degree of financial frictions. Changes in the degree of financial frictions are modelled as changes in parameters of a hybrid New-Keynesian model calibrated for the UK, following Bean, Larsen and Nikolov (2002). Uncertainty about the degree of financial frictions is modelled as Markov switching between regimes without and with strong financial frictions. Optimal monetary policy is determined for different scenarios of permanent and temporary regime shifts in financial frictions, as well as for variations in financial frictions over the business cycle. Optimal monetary policy is found to be state-dependent. In each state, optimal monetary policy depends on the transition probabilities between the different regimes.
Subjects: 
financial frictions
monetary policy
uncertainty
JEL: 
E52
E58
E61
E44
Document Type: 
Working Paper

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