DNB paper examines robustness of monetary policy
Policy must avoid tail risks caused by central banks’ uncertainty over output gap, researchers argue
A paper by the Netherlands Bank (DNB) examines how monetary policy-makers should cope with their lack of real-time knowledge of key variables.
In Robust monetary policy under shock uncertainty, Mario Carceller and Jan Willem van den End examine one major problem that central banks face. Monetary policy-makers cannot observe the output gap in real time, meaning that they do not know the effect of demand and supply shocks on inflation.
The authors seek to discover which monetary policy reaction
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