Monetary Policy under Uncertainty in WAEMU: Parsimonious Model and Central Bank Preferences

This paper looks at the implications of monetary policy uncertainty in the WAEMU area over the period 1975Q1-2010Q2. Under uncertainty on the transmission mechanisms, the monetary policy must be cautious according to the Brainard conservatism principle. Using the linear quadratic stochastic control approach by introduction the variance covariance matrix of the estimated parameters in the optimal control theory the results through the optimal monetary policy rule yield that the policy-makers are always very cautious when they have an inflation and output gap stabilization objective. However, when they are concerned to smooth interest rate, their behavior becomes distinctly more aggressive.