Monetary Policy, Model Uncertainty, and ‘Policy Model Complacency’

Mark Setterfield
Written By SCEPA

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The question addressed in this paper is: can monetary policy succeed in stabilizing the economy even when the policy model on which it is predicated is mis-specified?

Using variants of the 3-equation New Consensus Macroeconomics model, it is shown that this question can be answered in the affirmative. The purpose of the paper is not to encourage indifference towards model uncertainty, however, but rather to warn against the perils of “policy model complacency”.

SCEPA
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