Uncertainty about the length of the monetary policy transmission lag : implications for monetary policy
This paper examines implications for monetary policy of uncertainty about the length of the monetary policy transmission lag in a stochastic environment. Two key questions are asked. Firstly, which type of inflation-forecast-based rules work well when the central bank does not know the length of the monetary policy transmission lag? The results show that rules that are less aggressive and more forward looking are more robust. That is, the performance of these rules are least affected by lag uncertainty. However, it is still the case that relatively more aggressive and less forward looking rules will produce lower inflation variability.