In many countries, the monetary policy instrument remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank’s policy instrument remains so unchanged. In the following analysis, we explore how Knightian uncertainty affects optimal monetary policy. We apply the Choquet expected decision...

This paper studies the implications of certain kinds of uncertainty for monetary policy. It first describes the optimum policy rule in a simple model of the transmission mechanism as in Ball and Svensson. It then examines how this rule ought to be modified when there is uncertainty about the parameters, about the time lags, or about the nature of shocks. The paper also discusses the case of a s...

T he world economy has experienced a bulk of positive and negative shocks in crude oil prices and exchange rates over the years, and that global inflation has undergone some changes. Such shocks have affected the macroeconomic variables in the countries of the world and have challenged the economies of these countries, and have led them to take different measures to protect themselves agai...

It is very appropriate that a conference on monetary policy transparency begin with a paper by Alex Cukierman. His 1986 paper with Allan Meltzer was the first modern treatment of transparency and the model developed in that paper continues to serve as the basic framework for much of the recent work in this area. Economists at most major central banks seem to feel the average inflation bias that...

This paper focuses on developing models to study influential factors on the inflation rate for a panel of available countries in the World Bank data base during 2008-2012‎. ‎For this purpose‎, Random effect log-linear and Ordinal logistic models are used for the analysis of continuous and categorical inflation rate variables‎. ‎As the original inflation rate response to variables shows an appar...

Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors that capture shortterm and long-term interest rate uncertainty. Increases in e...

When the nominal interest rate reaches its zero lower bound, credibility is crucial for conducting forward guidance. We determine optimal policy in a New Keynesian model when the central bank has imperfect credibility and cannot set the nominal interest rate below zero. In our model, an announcement of a low interest rate for an extended period does not necessarily reflect high credibility. Eve...