This paper uses a simple model of the Australian economy to empirically examine the consequences of parameter uncertainty for optimal monetary policy. Optimal policy responses are derived for a monetary authority that targets inflation and output stability. Parameter uncertainty is characterised...

Contents: Preface -- Part I: Imperfect information, responses to shocks, and credibility issues -- 1. Introduction, Part 1 -- 2. A basic model and some early results -- 3. The strategy of monetary policy: Targets, instruments and information variables -- 4. A variable price level, supply shocks...