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Complexity and Monetary Policy

Author

Listed:
  • Athanasios Orphanides

    (Massachusetts Institute of Technology)

  • Volker Wieland

    (University of Frankfurt)

Abstract
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as a laboratory, this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output-gap mismeasurement and make use of a new model database to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across eleven models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.

Suggested Citation

  • Athanasios Orphanides & Volker Wieland, 2013. "Complexity and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 167-204, January.
    • Handle: RePEc:ijc:ijcjou:y:2013:q:0:a:8
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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