Imperfect Knowledge and Monetary Policy

An exploration of the problem of formulating monetary policy in practice.

Vítor Gaspar (Author), Otmar Issing (Author), Oreste Tristani (Author), David Vestin (Author)

9780521671071, Cambridge University Press

Paperback, published 16 February 2006

152 pages, 1 table
21.6 x 14 x 0.8 cm, 0.19 kg

' … the book is commendable in its attempt to explain, through examples, the actual application of monetary policy and how real problems are tackled.' De Economist

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.

Acknowledgments
Introduction
Outline of the two lectures
First lecture: Monetary Policy in Uncharted Territory. 1. Introduction
2. Uncharted territory: unique historical events
3. Achieving price stability
4. Avoiding excess volatility in inflation, output and the interest rate
5. Pragmatic monetarism: The Bundesbank
6. A stability-oriented strategy: the ECB
7. Conclusions
Second lecture: Imperfect Knowledge, Learning and Conservatism. 1. Introduction
2. Time inconsistency, cost-push shocks and Rogoff's conservatism
3. Empirical output gap uncertainty
4. Output gap uncertainty, learning and conservatism
5. Different degrees of CB's knowledge and information
6. Conclusions
References.

Subject Areas: International economics [KCL], Macroeconomics [KCB]