The Effects of Transmission Uncertainty on the Flexibility-Credibility Tradeoff in Monetary Policy

In this paper we address the issue of how parameter uncertainty affects the optimal degree of central bank conservatism. The analysis is conducted in the standard macroeconomic model of a monetary policy game embedding an expectational Phillips-curve. Multiplicative "Brainard" uncertainty is added to the model. This means that the central bank's policy instrument has a stochastic impact on inflation. This type of uncertainty is particularly interesting, since it affects the credibility–flexibility tradeoff in monetary policymaking. We show that if the flexibility problem dominates, an increase in uncertainty reduces optimal conservatism. However, increases in uncertainty can also require increases in the optimal degree of conservatism. This happens when the central bank has a sufficiently large credibility problem. This is particularly clear in the case of the introduction of uncertainty at the margin. Furthermore, the coefficient of variation of inflation appears to contain useful information about the relative size of the credibility problem and, hence, about how incipient uncertainty can affect optimal conservatism in actual economies.credibility; flexibility; monetary policy; conservatism; uncertainty

Monetary Policy in EMU when the Transmission is Asymmetric and Uncertain

In this paper we address the issue of how transmission uncertainty could affect the choice between a federal monetary policy based on national data and one on aggregated data.We find that the uncertainty about the transmission process increases the need to take into account information about national economies in the formulation of optimal monetary policies in a monetary union.

Bayesian versus robust control approach towards parameter uncertainty in monetary policymaking: how close are the outcomes? Some illustrating evidence from the EMU economies

This paper tries to assess the proximity of the macroeconomic outcomes which could arise from a monetary policymaking process based upon either a robust control or a Bayesian (à la Brainard) approach towards parameter uncertainty. We use a small, structural, backward-looking, aggregate model of the EMU economies as the basis for this empirical exercise. After deriving the optimal feedback rules which correspond to the two approaches that we consider in this study, we assess their relative performances with respect to the behavior of the output gap and the in.ation rate volatilities and compare with the no-uncertainty benchmark case. We are particularly interested in the output-in.ation variability trade-o¤ which is usually associated with the implementation of the optimal monetary policy rule in the literature and in the distortions that the presence of parameter uncertainty and its taking into account via the robust control approach or the Bayesian method may induce to this trade-o¤. The results show that the performances of the rules are not too divergent but they appear to be highly contingent upon the preference parameters in the model, ie the relative weight that the monetary authorities attach to output variability (w.r.t. in.ation variability) in the loss function and the robustness aversion of the policymaker which is associated to the robust control approach. In particular, non-standard shapes of the output-in.ation variability trade-o¤ obtain in the robust control case what may be due to the way the misspeci-.cations associated with the worst case scenario feedback into the structural equations of the model. When the rules are considered within the nominal model, the volatility outcomes appear to be closer to each other.monetary policy, uncertainty, robust control, Brainard

Learning the optimal buffer-stock consumption rule of Carroll

This article questions the rather pessimistic conclusions of Allen et Carroll (2001) about the ability of consumer to learn the optimal buffer-stock based consumption rule. To this aim, we develop an agent based model where alternative learning schemes can be compared in terms of the consumption behaviour that they yield. We show that neither purely adaptive learning, nor social learning based on imitation can ensure satisfactory consumption behaviours. By contrast, if the agents can form adaptive expectations, based on an evolving individual mental model, their behaviour becomes much more interesting in terms of its regularity, and its ability to improve performance (which is as a clear manifestation of learning). Our results indicate that assumptions on bounded rationality, and on adaptive expectations are perfectly compatible with sound and realistic economic behaviour, which, in some cases, can even converge to the optimal solution. This framework may therefore be used to develop macroeconomic models with adaptive dynamics.Consumption decisions; Learning; Expectations; Adaptive behaviour; Computational economics

On the Proper Computation of the Hausman Test Statistic in Standard Linear Panel Data Models: Some Clarifications and New Results

We provide new analytical results for the implementation of the Hausman specification test statistic in a standard panel data model, comparing the version based on the estimators computed from the untransformed random effects model specification under Feasible Generalized Least Squares and the one computed from the quasi-demeaned model estimated by Ordinary Least Squares. We show that the quasi-demeaned model cannot provide a reliable magnitude when implementing the Hausman test in a finite sample setting, although it is the most common approach used to produce the test statistic in econometric software. The difference between the Hausman statistics computed under the two methods can be substantial and even lead to opposite conclusions for the test of orthogonality between the regressors and the individual-specific effects. Furthermore, this difference remains important even with large cross-sectional dimensions as it mainly depends on the within-between structure of the regressors and on the presence of a significant correlation between the individual effects and the covariates in the data. We propose to supplement the test outcomes that are provided in the main econometric software packages with some metrics to address the issue at hand

La théorie des zones monétaires optimales au regard de l'euro : quels enseignements après dix années d'union économique et monétaires en Europe ?

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La politique monétaire face à l'incertitude : un survol méthodologique des contributions relatives à la zone euro

Monetary policy in the presence of uncertainty : a survey with special emphasis on EMU The aim of this contribution is to provide a survey on the literature regarding the uncertainty issue for monetary policymaking in EMU. Based on a distinction on three kinds of uncertainty, it also offers a methodological viewpoint on the way this problem may be tackled at an empirical level. A strong emphasis is put on parameter uncertainty, which may surround the aggregate transmission channel of monetary policy in EMU. JEL classifications : E5, E52Cette contribution se présente comme un bilan des travaux récents consacrés à la gestion de l’incertitude par la politique monétaire et aux critères permettant d’appréhender cette question sur le plan empirique. L’accent est mis sur l’incertitude qui entoure le mécanisme de transmission de la politique monétaire dans l’Euroland. Classification JEL : E5, E52Sénégas Marc-Alexandre. La politique monétaire face à l'incertitude : un survol méthodologique des contributions relatives à la zone euro . In: Revue d'économie financière, n°65, 2002. Trois ans de politique monétaire européenne. pp. 177-200

La théorie des zones monétaires optimales au regard de l'euro : Quels enseignements après dix années d'union économique et monétaire en Europe ?

This paper tries to draw some lessons of the experience of ten years of EMU for the theory of Optimum Currency Areas. It examines whether, in the light of EMU, the OCA theory may be considered as a relevant framework for assessing the functioning of a monetary union as well as the costs and benefits which ensue from it for its member countries. To this aim, both the traditional approach of OCA (based on the quest for optimality criteria) and the endogeneity approach (according to which a monetary union will endogenously become an optimal currency area) are considered. It appears that the first approach may be of limited scope if we would like to use it so as to assess the role played by asymmetries in the functioning of a monetary union. Moreover, only moderate evidence is found that EMU is endogenously turning into an optimum currency area.

La politique française de désinflation compétitive : les faits et gestes en perspective

Introduction La désinflation compétitive a constitué le cœur de la politique économique de la France pendant la quinzaine d’années qui a précédé la création de l’euro. Cette stratégie a combiné une politique macroéconomique de stabilité et des mesures structurelles d’adaptation de l’économie. Les responsables économiques et les gouvernements successifs ont privilégié la lutte contre l’inflation dans une perspective de long terme. Le changement de cap décidé en mars 1983, loin d’être une paren..