The Effects of Monetary Policy on Unemployment Dynamics under Model Uncertainty - Evidence from the US and the Euro Area

44 Pages Posted: 11 Mar 2009

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Matteo Ciccarelli

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small.

Keywords: monetary policy, model uncertainty, Bayesian model averaging, unemployment gap, Taylor rule

JEL Classification: C11, E24, E52, E58

Suggested Citation

Altavilla, Carlo and Ciccarelli, Matteo, The Effects of Monetary Policy on Unemployment Dynamics under Model Uncertainty - Evidence from the US and the Euro Area (March 2009). CESifo Working Paper Series No. 2575, Available at SSRN: https://ssrn.com/abstract=1357245

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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