Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82433
Authors: 
Söderström, Ulf
Year of Publication: 
1999
Series/Report no.: 
Sveriges Riksbank Working Paper Series 84
Abstract: 
Simple models of monetary policy often imply optimal policy behavior that is considerably more aggressive than what is commonly observed. This paper argues that such counterfactual implications are due to model restrictions and a failure to account for multiplicative parameter uncertainty, rather than to policymakers being too cautious in their implementation of policy. Comparing a restricted and an unrestricted version of the same empirical model, the unrestricted version leads to less volatility in optimal policy, and, taking parameter uncertainty into account, to policy paths very close to actual Federal Reserve policy.
Subjects: 
Optimal monetary policy
parameter uncertainty
interest rate smoothing
JEL: 
E52
E58
Document Type: 
Working Paper

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