Working Paper No. 96
By Simon Hall, Chris Salmon, Tony Yates and Nicoletta Batini
We investigate the effects of additive and multiplicative uncertainty upon the stabilisation properties of a simple base money rule for monetary policy.
Using a five-equation empirical model of the United Kingdom, we show that changes in the extent of additive uncertainty have no effect upon the ‘optimal’
degree of policy responsiveness to shocks to the economy. However, we find that policy-makers should respond by less to shocks in the face of
multiplicative uncertainty. And as multiplicative uncertainty rises, so the optimal degree of policy reaction falls. This accords with Brainard’s (1967)
theoretical analysis and could be interpreted as justifying a gradualist monetary policy.