Monetary Policy

We consider a sequence of monetary policy analyses with progressively more and different aspects. We start in section 3.1 with selecting an interest rate based on a Taylor rule, given uncertainty in the parameters of the macro-economic model. In section 3.2 we include public expectations about inflation and output gap, and consider both the choice of the interest rate and the choice of the degree of credibility of the central bank’s announced goals. In section 3.3 we add shocks to inflation and output gap, while the tails of the probability distributions of these shocks may differ substantially from what is anticipated. In section 3.4 we consider an uncertain economic model subject to shocks, in an economy with heterogeneous sectors whose beliefs about central bank credibility are uncertain to the bank.