Monetary policy evaluation with noisy information

By Athanasios Orphanides. 2003

510 citations recorded by the source corpus.

This paper investigates the implications of noisy information regarding the measurement of economic activity for the evaluation of monetary policy. A common implicit assumption in such evaluations is that policymakers observe the current state of the economy promptly and accurately and can therefore adjust policy based on this information. However, in reality, decisions are made in real time when there is considerable uncertainty about the true state of affairs in the economy. Policy must be made with partial information. Using a simple model of the U.S. economy, I show that failing to account for the actual level of information noise in the historical data provides a seriously distorted picture of feasible macroeconomic outcomes and produces inefficient policy rules. Naive adoption of policies identified as efficient when such information noise is ignored results in macroeconomic performance worse than actual experience. When the noise content of the data is properly taken into account, policy reactions are cautious and less sensitive to the apparent imbalances in the unfiltered data. The resulting policy prescriptions reflect the recognition that excessively activist policy can increase rather than decrease economic instability.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/d1e4bddb358cab03106f28b90912dce7f4a2a2c4

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Citations in the corpus

The Limits of Transparency (2011, unknown): “18 Orphanides (2003) advocates taking the output gap completely out of the loss function because of such”
Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy (2005, unknown): “2In particular, a number of studies with U.S. data have found that uncertainty arising from revisions of output gap and inflation measurements may lead to a significant deterioration in the performance of such interest rate rules; see Orphanides (1998), Orphanides et al. (2000) and Rudebusch (2000).”
Evaluating early warning indicators of banking crises: Satisfying policy requirements (2014, background): “Such behaviour can be optimal when information is noisy (see eg Orphanides (2003) in the context of monetary policy).”
Historical monetary policy analysis and the Taylor rule (2003, methodology): “(These rules are similar to the estimated Taylor-style rules in Clarida, Gali and Gertler (1999, 2000), and Orphanides (2001, 2002, 2003).)”
Inflation Zone Targeting (2000, unknown): “…of adaptive expectations and have abstracted from the possible gains from commitment to maintaining inflation stability that become evident in more forward looking models (e.g. Clarida, Gali and Gertler, 1999; Lengwiler and Orphanides, 1998; Levin, Wieland and Williams 1999; and Woodford, 1999).”
Monetary Policy Inertia: Fact or Fiction? (2006, unknown): “…it may be the case that the noisier the economic data are, the less aggressive policymakers should be in responding to it (Rudebusch, 2001, and Orphanides, 2003).24 However, in practice, as noted by Rudebusch (2001) any such inducement toward timidity (that is, a low gπ and gy) appears fairly…”
Central bank communication and expectations stabilization (2010, background): “However, consistent with Orphanides andWilliams (2005), we show that even when expectations are well anchored in the case of announcing an ination target, variations in expectations lead to greater business cycle uctuations in response to shocks than in the case where all details of the monetary p”
Asset prices and central bank policy (2000, background): “Orphanides (1998) contains a comparison of real-time estimates (i.”