Welfare-Maximizing Monetary Policy under Parameter Uncertainty


Rochelle M. Edge

Thomas Laubach

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2007-11 | May 1, 2008

This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the "natural" rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best.

Article Citation

Williams, John C., Rochelle M. Edge, and Thomas Laubach. 2007. “Welfare-Maximizing Monetary Policy under Parameter Uncertainty,” Federal Reserve Bank of San Francisco Working Paper 2007-11. Available at https://doi.org/10.24148/wp2007-11

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