Transmission mechanism of monetary policy

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The statement is false. With uncertainty about the transmission mechanism of monetary policy ( the parameters in the equations describing the model of the economy) it is often the case that the optimal monetary policy response to a known shock is smaller in absolute value than when the transmission mechanism is known with certainty. The reason is that the more active the monetary policy response, the greater is the variance of the policy instrument that is multiplied by an unknown coefficient, increasing uncertainty about the outcomes that the central bank cares about.

Reference no: EM133042154

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