Monetary policy, parameter uncertainty and optimal learning

Arbeitspapier

Since central banks have limited information concerning the transmission channel of monetary policy, they are faced with the difficult task of simultaneously controlling the policy target and estimating the impact of policy actions. A tradeoff between estimation and control arises because policy actions influence estimation and provide information which may improve future performance. I analyze this tradeoff in a simple model with parameter uncertainty and conduct dynamic simulations of the policymaker's decision problem in the presence of the type of uncertainties that arose in the wake of German reunification. A policy that separates learning from control may induce a persistent upward bias in money growth and inflation, just as observed after unification. In contrast, the optimal learning strategy which exploits the tradeoff between control and estimation significantly improves stabilization performance and reduces the likelihood of inflationary bias.

Object Details

• Language: Deutsch

References and Relationships

• Bibliographic citation: Series: ZEI Working Paper ; No. B 09-1999

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Money and Interest Rates: General ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Operations Research; Statistical Decision Theory
• Subject: optimal control with unknown parameters ; Bayesian learning ; monetary policy ; structural change ; learning by doing ; inflation targeting

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wieland, Volker
• Event: Veröffentlichung
• (who): Rheinische Friedrich-Wilhelms-Universität Bonn, Zentrum für Europäische Integrationsforschung (ZEI)
• (where): Bonn
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/39532
• Last update: 10.03.2025, 11:44 AM CET