Insurance policies for monetary policy in the Euro area

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 insuran
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 aMinimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion.These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. JEL Klassifikation: E52, E58, E61. 
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Metadaten
Author:Keith Küster, Volker Wieland
URN:urn:nbn:de:hebis:30-10892
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,13
Series (Serial Number):CFS working paper series (2005, 13)
Document Type:Working Paper
Language:English
Year of Completion:2005
Year of first Publication:2005
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2005/06/13
Tag:Euro Area; Minimax; Model Uncertainty; Monetary Policy Rules; Robustness
SWD-Keyword:Europäische Union; Geldpolitik; Währungsunion
Issue:April 2005
HeBIS PPN:197300995
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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