In this paper, we assume that the natural rate of interest is fundamentally uncertain. Based on a small-scale macroeconomic model, info-gap theory is used to rank different monetary policy strategies in terms of their robustness against this uncertainty. Applied to the euro area, we find that an inert or patient monetary strategy is more robust to natural rate uncertainty than a strategy that follows an estimated Taylor rule. An actively responsive monetary strategy is least robust. Our analysis presents a methodology that is applicable in a wide range of policy analyses under deep uncertainty.
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© 2020 John Wiley & Sons Ltd
- Knightian uncertainty
- monetary policy
- monetary strategy