IMF Working Papers

Interest Rate Sensitivity Scenarios to Guide Monetary Policy

By Allan Dizioli

May 30, 2025

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Format: Chicago

Allan Dizioli. "Interest Rate Sensitivity Scenarios to Guide Monetary Policy", IMF Working Papers 2025, 107 (2025), accessed July 10, 2025, https://doi.org/10.5089/9798229010825.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the challenges of formulating monetary policy in the face of heightened uncertainty. We develop a framework to assess the optimal monetary policy path under uncertainty, focusing on four key dimensions: the expectation formation process, inflation persistence, the measurement of the neutral interest rate, and the slope of the Phillips curve. Our framework provides a flexible tool for policymakers to address uncertainty and enhance decision-making in pursuit of economic stability. This framework is helpful to improve the risk management approach to monetary policy by showing how scenarios can quantify different sources of uncertainty faced by the ECB and give market participants an idea of how the ECB would react if those scenarios materialize.

Subject: Central bank policy rate, Economic theory, Financial services, Inflation, Inflation persistence, Output gap, Prices, Production, Rational expectations

Keywords: Bayesian estimation, Central bank policy rate, Central bank preference, DSGE, Europe, Forecasting and simulation, Inflation, Inflation deviation, Inflation dynamics, Inflation expectation, Inflation persistence, Interest rate sensitivity scenario, Optimal monetary policy, Output gap, Policy rule, Rational expectations

Publication Details

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