In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate...

In this paper we consider expected value and mean variance optimization of a general forward--looking stochastic model. The problem is transformed into a general--nonlinear programming problem by adding extra constraints, which restrict the policy maker to commit to a certain policy. Based on...

This paper considers optimal decision-making in an environment with changing parameters. The decision maker's beliefs regarding these unknown, time-varying parameters are normal distributions and are updated according to Bayes rule. Optimal decisions involve a certain degree of experimentation....

In recent years, a number of researchers have advocated monetary policy rules for setting the short-term nominal interest rate rules in response to forecasts of inflation, rather than recent outcomes of a limited set of macroeconomic variables such as the well-known Taylor rule. Furthermore,...

This paper investigates optimal monetary policy in an economy, in which the output-inflation trade off faced by the central bank is influenced by two important forces: (i) the presence of uncertain and possibly changing parameters, and (ii) private sector expectations regarding the central...

This paper presents a numerical nonlinear dynamic programming algorithm for solving so-called optimal learning or adaptive control problems. These are decision problems with unknown parameters where the decisionmaker updates beliefs by Bayes rule. The updating equations are nonlinear. As a...

With the formation of European Monetary Union (EMU) in 1999, the eleven countries that adopted the Euro began to conduct a single monetary policy oriented towards union-wide objectives. The objective of this paper is to construct a small model of the Euro area, which may serve as a laboratory...

Recently, increasing attention is being devoted to interest rate rules that respond directly to economic forecasts rather than relying on current and past observations. Empirical studies suggest this 'forward-looking' rule provides a reasonable description of recent monetary policy in several...