Monetary Policy and Uncertainty about the Natural Unemployment Rate
- 1 April 1998
- journal article
- Published by Board of Governors of the Federal Reserve System in Finance and Economics Discussion Series
- Vol. 1998.0 (22) , 1-45
- https://doi.org/10.17016/feds.1998.22
Abstract
This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and inflation close to target.Keywords
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