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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Monetary policy and uncertainty about the natural unemployment rate
Volker W. Wieland
Abstract

This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and inflation close to target.


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Volker W. Wieland, Monetary policy and uncertainty about the natural unemployment rate, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 1998-22, 1998.
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Keywords: Monetary policy ; Unemployment
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