Ch 12 - Monetary policy and data/parameter uncertainities

Question 1

Final value announced =

Answer 1

Initial announcement + final revision

Question 2

Final revision =

Answer 2

Latest observation - initial announcement

Question 3

What are 3 reasons for revisons?

Answer 3

Short run revisions based on additional source data
Benchmark revisions based on structural changes or updating base year
Measurement error

Question 4

What is well behaved data?

Answer 4

Revisions are done because of new data arrivals that are not forecastable at the time of the forecast

Question 5

What are 3 properties of well behaved revisions?

Answer 5

Mean zero
Final revision should be unpredictable given the info set at the time of the initial announcement
The variance of the final revision should be small compared to the variance of the final value of the data

Question 6

What are the assumptions in Poole’s model?

Answer 6

Parameters and structure of the model are known with certainty
IS and LM schedules are allowed to be subject to zero mean and random errors

Question 7

What is the certainty equivalent result?

Answer 7

Policy rate set by the policy maker is the same as the one that it would set if there were no shocks hitting the economy

Question 8

What is interest rate smoothing?

Answer 8

Cautious reaction the CB to uncertainty over the dynamic structure of the economy