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OPTIMAL MONETARY POLICY UNDER PARAMETER UNCERTAINTY IN A SIMPLE MICROFOUNDED MODEL

Published online by Cambridge University Press:  10 February 2010

Takushi Kurozumi
Takushi Kurozumi*
Affiliation:
Bank of Japan
*
Address correspondence to: Takushi Kurozumi, Bank of Japan, Tokyo 103-8660, Japan; e-mail: takushi.kurozumi@boj.or.jp.
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Abstract

This paper examines optimal monetary policy under uncertainty about fundamental parameters of a dynamic stochastic general-equilibrium model. In contrast to previous studies, a microfoundation of the model leads this uncertainty to generate uncertainty not only about the transmission of monetary policy but also about the transmission of shocks and about a social welfare loss function. In the presence of such uncertainty, this paper finds conditions under which optimal discretionary policy responds to shocks more aggressively than in the absence of the uncertainty. These conditions depend crucially on the persistence of shocks and the magnitude of policy multipliers. To obtain the conditions, taking proper account of uncertainty about the transmission of shocks and about the welfare loss function is of crucial importance.

Keywords

Optimal Monetary PolicyParameter UncertaintyMicrofoundation
Type
Notes
Information
Macroeconomic Dynamics , Volume 14 , Issue 2 , April 2010 , pp. 257 - 268
Copyright
Copyright © Cambridge University Press 2010

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