Robust Monetary Policy in the New-Keynesian Framework
IGIER Working Paper No. 273
18 Pages Posted: 7 Dec 2004
There are 3 versions of this paper
Robust Monetary Policy in the New-Keynesian Framework
Robust Monetary Policy in the New-Keynesian Framework
Robust Monetary Policy in the New-Keynesian Framework
Date Written: November 2004
Abstract
We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analyzing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).
Keywords: Knightian uncertainty, model uncertainty, robust control, minmax policies
JEL Classification: E52, E58, F41
Suggested Citation: Suggested Citation
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