Imperfect knowledge and the pitfalls of optimal control monetary policy

Imperfect knowledge and the pitfalls of optimal control monetary policy

Sixty years ago, Milton Friedman questioned the usefulness of the optimal control approach because of policymakers’ imperfect knowledge of the economy and favored instead a simple rule approach to monetary policy (1947, 1948). These are still live issues, despite the development of powerful techniqu...

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Autores principales: Orphanides, Athanasios 1965-, Williamson, John
Formato: Artículo
Lenguaje:eng
Publicado: Banco Central de Chile 2019
Materias:
POLÍTICA MONETARIA
BANCOS CENTRALES
Acceso en línea:https://hdl.handle.net/20.500.12580/3748
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spelling oai-20.500.12580-37482021-04-24T11:02:35Z Imperfect knowledge and the pitfalls of optimal control monetary policy Orphanides, Athanasios 1965- Williamson, John POLÍTICA MONETARIA BANCOS CENTRALES Sixty years ago, Milton Friedman questioned the usefulness of the optimal control approach because of policymakers’ imperfect knowledge of the economy and favored instead a simple rule approach to monetary policy (1947, 1948). These are still live issues, despite the development of powerful techniques to derive and analyze optimal control policies, which central banks use in their large-scale models (see Svensson and Woodford, 2003, Woodford, 2003, Giannoni and Woodford, 2005, Svensson and Tetlow, 2005). Although the optimal control approach provides valuable insights, it also presents problems. In particular, because it assumes a single correctly specified reference model, it ignores important sources of uncertainty about the economy that monetary policymakers face. Robust control methods of the type analyzed by Hansen and Sargent (2007) extend the standard optimal control approach to allow for unspecified model uncertainty, however, these methods are designed for relatively modest deviations from the reference model 2019-11-01T00:04:32Z 2019-11-01T00:04:32Z 2009 Artículo 978-956-7421-32-9 https://hdl.handle.net/20.500.12580/3748 eng Series on Central Banking, Analysis, and Economic Policies, no. 13 Attribution-NonCommercial-NoDerivs 3.0 Chile http://creativecommons.org/licenses/by-nc-nd/3.0/cl/ .pdf Sección o Parte de un Documento p. 115-144 application/pdf Banco Central de Chile
institution Banco Central
collection Banco Central
language eng
topic POLÍTICA MONETARIA
BANCOS CENTRALES
spellingShingle POLÍTICA MONETARIA
BANCOS CENTRALES
Orphanides, Athanasios 1965-
Williamson, John
Imperfect knowledge and the pitfalls of optimal control monetary policy
description Sixty years ago, Milton Friedman questioned the usefulness of the optimal control approach because of policymakers’ imperfect knowledge of the economy and favored instead a simple rule approach to monetary policy (1947, 1948). These are still live issues, despite the development of powerful techniques to derive and analyze optimal control policies, which central banks use in their large-scale models (see Svensson and Woodford, 2003, Woodford, 2003, Giannoni and Woodford, 2005, Svensson and Tetlow, 2005). Although the optimal control approach provides valuable insights, it also presents problems. In particular, because it assumes a single correctly specified reference model, it ignores important sources of uncertainty about the economy that monetary policymakers face. Robust control methods of the type analyzed by Hansen and Sargent (2007) extend the standard optimal control approach to allow for unspecified model uncertainty, however, these methods are designed for relatively modest deviations from the reference model
format Artículo
author Orphanides, Athanasios 1965-
Williamson, John
author_facet Orphanides, Athanasios 1965-
Williamson, John
author_sort Orphanides, Athanasios 1965-
title Imperfect knowledge and the pitfalls of optimal control monetary policy
title_short Imperfect knowledge and the pitfalls of optimal control monetary policy
title_full Imperfect knowledge and the pitfalls of optimal control monetary policy
title_fullStr Imperfect knowledge and the pitfalls of optimal control monetary policy
title_full_unstemmed Imperfect knowledge and the pitfalls of optimal control monetary policy
title_sort imperfect knowledge and the pitfalls of optimal control monetary policy
publisher Banco Central de Chile
publishDate 2019
url https://hdl.handle.net/20.500.12580/3748
work_keys_str_mv AT orphanidesathanasios1965 imperfectknowledgeandthepitfallsofoptimalcontrolmonetarypolicy
AT williamsonjohn imperfectknowledgeandthepitfallsofoptimalcontrolmonetarypolicy
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