Changes in GDP's measurement error volatility and response of the monetary policy rate: Two approaches

@inproceedings{ParraPolania2014ChangesIG,
  title={Changes in GDP's measurement error volatility and response of the monetary policy rate: Two approaches},
  author={Julian A. Parra-Polania and Carmi{\~n}a O. Vargas},
  year={2014}
}
Using a stylized model in which output is measured with error, we derive the optimal policy response to the demand shock signal and to changes in the measurement error volatility from two different perspectives: the minimization of the expected loss (from which we derive the ‘standard’ policy) and the minimization of the maximum possible loss across all potential scenarios (from which we derive the ‘prudent’ or ‘robust’ policy). We find that (1) the prudent policymaker reacts more aggressively… CONTINUE READING