Monetary Policy With Imperfect Knowledge

Author : Athanasios Orphanides
Publisher :
ISBN 13 :
Total Pages : 76 pages
Book Rating : 4.06/5 ( download)

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Download or read book Robust Monetary Policy with Imperfect Knowledge written by Athanasios Orphanides and published by . This book was released on 2007 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change andwhere private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but areuncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation :rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates.

Author : Vítor Gaspar
Publisher : Cambridge University Press
ISBN 13 : 9781139448567
Total Pages : 160 pages
Book Rating : 4.60/5 ( download)

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Download or read book Imperfect Knowledge and Monetary Policy written by Vítor Gaspar and published by Cambridge University Press. This book was released on 2006-02-16 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on lectures given as part of The Stone Lectures in Economics, this book discusses the problem of formulating monetary policy in practice, under the uncertain circumstances which characterize the real world. The first lecture highlights the limitations of decision rules suggested by the academic literature and recommends an approach involving, first, a firm reliance on the few fundamental and robust results of monetary economics and, secondly, a pragmatic attitude to policy implementation, taking into consideration lessons from central banking experience. The second lecture revisits Milton Friedman's questions about the effects of active stabilization policies on business cycle fluctuations. It explores the implications of a simple model where the policy maker has imperfect knowledge about potential output and the private sector forms expectations according to adaptive learning. This lecture shows that imperfect knowledge limits the scope for active stabilization policy and strengthens the case for conservatism.

Author : Athanasios Orphanides
Publisher :
ISBN 13 :
Total Pages : 38 pages
Book Rating : 4.76/5 ( download)

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Download or read book Monetary Policy with Imperfect Knowledge written by Athanasios Orphanides and published by . This book was released on 2005 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.

Author : Roman Frydman
Publisher : Princeton University Press
ISBN 13 : 0691261156
Total Pages : 368 pages
Book Rating : 4.57/5 ( download)

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Download or read book Imperfect Knowledge Economics written by Roman Frydman and published by Princeton University Press. This book was released on 2023-09-26 with total page 368 pages. Available in PDF, EPUB and Kindle. Book excerpt: Posing a major challenge to economic orthodoxy, Imperfect Knowledge Economics asserts that exact models of purposeful human behavior are beyond the reach of economic analysis. Roman Frydman and Michael Goldberg argue that the longstanding empirical failures of conventional economic models stem from their futile efforts to make exact predictions about the consequences of rational, self-interested behavior. Such predictions, based on mechanistic models of human behavior, disregard the importance of individual creativity and unforeseeable sociopolitical change. Scientific though these explanations may appear, they usually fail to predict how markets behave. And, the authors contend, recent behavioral models of the market are no less mechanistic than their conventional counterparts: they aim to generate exact predictions of "irrational" human behavior. Frydman and Goldberg offer a long-overdue response to the shortcomings of conventional economic models. Drawing attention to the inherent limits of economists' knowledge, they introduce a new approach to economic analysis: Imperfect Knowledge Economics (IKE). IKE rejects exact quantitative predictions of individual decisions and market outcomes in favor of mathematical models that generate only qualitative predictions of economic change. Using the foreign exchange market as a testing ground for IKE, this book sheds new light on exchange-rate and risk-premium movements, which have confounded conventional models for decades. Offering a fresh way to think about markets and representing a potential turning point in economics, Imperfect Knowledge Economics will be essential reading for economists, policymakers, and professional investors.

Author : Vítor Gaspar
Publisher : Cambridge University Press
ISBN 13 : 9780521854863
Total Pages : 152 pages
Book Rating : 4.65/5 ( download)

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Download or read book Imperfect Knowledge and Monetary Policy written by Vítor Gaspar and published by Cambridge University Press. This book was released on 2006-02-16 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on lectures given as part of The Stone Lectures in Economics, this book discusses the problem of formulating monetary policy in practice, under the uncertain circumstances which characterize the real world. How should central banks set monetary policy? In which way should they take uncertainty into account when designing a monetary policy strategy? Should they respond to shocks aggressively or cautiously? These questions are discussed both with reference to the experience of the Bundesbank and of the European Central Bank and in relation to a simple stylized economic model.

Author : Ben S. Bernanke
Publisher : University of Chicago Press
ISBN 13 : 0226044734
Total Pages : 469 pages
Book Rating : 4.36/5 ( download)

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Download or read book The Inflation-Targeting Debate written by Ben S. Bernanke and published by University of Chicago Press. This book was released on 2007-11-01 with total page 469 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

Author : Athanasios Orphanides
Publisher :
ISBN 13 :
Total Pages : 46 pages
Book Rating : 4.31/5 ( download)

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Download or read book Imperfect Knowledge, Inflation Expectations, and Monetary Policy written by Athanasios Orphanides and published by . This book was released on 2002 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the role that imperfect knowledge about the structure of the economy plays in the formation of expectations, macroeconomic dynamics, and the efficient formulation of monetary policy. Economic agents rely on an adaptive learning technology to form expectations and to update continuously their beliefs regarding the dynamic structure of the economy based on incoming data. The process of perpetual learning introduces an additional layer of dynamic interaction between monetary policy and economic outcomes. We find that policies that would be efficient under rational expectations can perform poorly when knowledge is imperfect. In particular, policies that fail to maintain tight control over inflation are prone to episodes in which the public's expectations of inflation become uncoupled from the policy objective and stagflation results, in a pattern similar to that experienced in the United States during the 1970s. Our results highlight the value of effective communication of a central bank's inflation objective and of continued vigilance against inflation in anchoring inflation expectations and fostering macroeconomic stability.

Author : Athanasios Orphanides
Publisher : DIANE Publishing
ISBN 13 : 1437935613
Total Pages : 46 pages
Book Rating : 4.15/5 ( download)

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Download or read book Monetary Policy Mistakes and the Evolution of Inflation Expectations written by Athanasios Orphanides and published by DIANE Publishing. This book was released on 2010 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? The authors use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. The authors document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. They show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Charts and tables.

Author : Athanasios Orphanides
Publisher :
ISBN 13 :
Total Pages : 70 pages
Book Rating : 4.76/5 ( download)

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Download or read book Inflation Targeting Under Imperfect Knowledge written by Athanasios Orphanides and published by . This book was released on 2006 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Author : Michael D. Bordo
Publisher : University of Chicago Press
ISBN 13 : 0226066959
Total Pages : 545 pages
Book Rating : 4.50/5 ( download)

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Download or read book The Great Inflation written by Michael D. Bordo and published by University of Chicago Press. This book was released on 2013-06-28 with total page 545 pages. Available in PDF, EPUB and Kindle. Book excerpt: Controlling inflation is among the most important objectives of economic policy. By maintaining price stability, policy makers are able to reduce uncertainty, improve price-monitoring mechanisms, and facilitate more efficient planning and allocation of resources, thereby raising productivity. This volume focuses on understanding the causes of the Great Inflation of the 1970s and ’80s, which saw rising inflation in many nations, and which propelled interest rates across the developing world into the double digits. In the decades since, the immediate cause of the period’s rise in inflation has been the subject of considerable debate. Among the areas of contention are the role of monetary policy in driving inflation and the implications this had both for policy design and for evaluating the performance of those who set the policy. Here, contributors map monetary policy from the 1960s to the present, shedding light on the ways in which the lessons of the Great Inflation were absorbed and applied to today’s global and increasingly complex economic environment.