This paper deals with the linear quadratic stochastic control approach to assessing the effects of parameter estimation uncertainty on the central banker behavior. The treatment of parameter estimation uncertainty is covered by the introduction of the full variance-covariance matrix of the parameters estimates in the optimal control theory. The proposed approach is simple to implement and is applicable to a large class of model. The principle of conservatism of Brainard is found empirically relevant for a Euro area policymaker.

This note applies H-infinite methods to an estimated hybrid monetary policy model (cf. Sahuc, Applied Economics Letters, 9, pp. 949-55, 2002) and derives standard and robust optimal interest rate rules. We find that the "robust" central banker responds more aggressively than it does without concerns for robustness and that the responses of the state variables in this case are not necessarily always stronger than the standard ones.

"In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post-1994, the authors estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy."--Abstract.