No. 299 - Excessive Activism or Passivism of Monetary Policy?

The view of monetary policy that emphasizes transmission uncertainty tends to view policy as excessively passive. By contrast, the view that emphasizes credibility aspects tends to see it as excessively active. We formulate a model that integrates simple features from both these views, rather than neglecting a priori any of them. The model highlights a clear distinction between two notions of policy activism. Two measures of policy activism are obtained that under certain assumptions may simultaneously appear in the model. This implies that normative judgment about policy activism generally requires a precise specification of the notion one is referring to. We then consider the effects of the degree of transmission uncertainty on welfare.