Monetary Policy under Uncertainty: Historical Origins, by Oliver Sauter

By Oliver Sauter

Oliver Sauter analyzes 3 features of financial coverage lower than uncertainty. First he indicates that the phrases hazard and uncertainty are usually wrongly used as synonyms regardless of their diverse meanings. the second one element is the correct exam and incorporation of uncertainty right into a financial coverage framework. the writer undertakes systematization with a more in-depth examine every one pointed out kind of uncertainty. Thirdly, he specializes in the quantification of uncertainty from various views, both from a marketplace point of view or from a crucial financial institution standpoint.

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Extra resources for Monetary Policy under Uncertainty: Historical Origins, Theoretical Foundations, and Empirical Evidence

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Those probabilities need to be discovered or learned. If, however, frequencies are revealed one is entitled to name a probability, thus Knight labels these situations risk. Due to the underlining assumption of a random generator which produces outcomes, probability statements are somehow statements about this generator, hence, probability can be defined as P r[G](k). A probability statement is thus a statement about the probability of realizing a certain outcome 13 14 The dichotomy of aleatory and epistemic is strongly connected to the work of Lawson (1985, 1988), especially when applied on Knight and Keynes.

By this futureoriented acting, we have to estimate the given factors, changes, and interdependences, as well as the probability of their occurrence (Knight 1921). Because “the world is made up of things, which, under the same circumstances always behave in the same way” (Knight 1921:204), some things can be inferred by past data. This shows the connection of Knight’s conception to the relative frequency approach mentioned before, albeit it is not the same. However, the citation also reveals a fundamental property 22 1.

A second approach to model uncertainty follows Bayesian principles, and targets a policy rule that works well over a range of models with different set-ups. This model averaging approach was mainly brought forward due to the impossibility to come to a compromise regarding the best strategy in dealing with model uncertainty. Within this category is also the idea of implementing possible switches between a set of models. The monetary authority must then calculate her optimal response with respect to a possible regime switch.

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