This paper shows that--in contrast to the received wisdom--uncertainty about the parameters in a dynamic macroeconomic model may lead to more aggressive monetary policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond...

The effects of firm-specific shocks on the gain from writing state-contingent wage contracts are examine in an extension of the model in Gottfries (1992). It is shown that the introduction of firm-specific uncertainty increases the gain from indexation to prices only moderately. Moreover,...

Using an empirical New-Keynesian model with optimal discretionary monetary policy, we estimate key parameters-the central bank's preference parameters; the degree of forward-looking behavior in the determination of inflation and output; and the variances of inflation and output shocks-to match...