Monetary Policy with Imperfect Knowledge


Athanasios Orphanides

Download PDF
(169 KB)

2005-17 | October 1, 2005

We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.

Article Citation

Orphanides, Athanasios, and John C. Williams. 2005. “Monetary Policy with Imperfect Knowledge,” Federal Reserve Bank of San Francisco Working Paper 2005-17. Available at

About the Author
John C. Williams served as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco from March 1, 2011 to June 17, 2018. Dr. Williams was previously the executive vice president and director of research for the San Francisco bank, which he joined in 2002. He began his career in 1994 as an […] Learn more about John C. Williams