Working Paper: NBER ID: w9969
Authors: Martin Feldstein
Abstract: This paper discusses the nature of the uncertainty faced by central banks and considers three approaches to dealing with uncertainty(1) formal optimization models and robust rules based on such models; (2) informal rules like the Taylor rule and inflation targeting; and (3) a case by case approach based on an informal Bayesian logic. The latter case requires considering the asymmetric nature of the risks that the central bank often faces.
Keywords: No keywords provided
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty about the state of the economy (D89) | variations in inflation and output (E31) |
| rising inflation expectations (E31) | inflation spiral (E31) |
| central banks can anchor expectations (E52) | avoid inflation spirals (E31) |
| increased uncertainty (D89) | reduced spending (H56) |
| reduced spending (H56) | affects aggregate demand (E00) |
| rising inflation (E31) | increased inflation expectations (E31) |
| increased inflation expectations (E31) | exacerbates inflation (E31) |
| strength of policy actions (D78) | reflects central bank's confidence in stabilizing effects (E58) |