Trend Growth and Robust Monetary Policy

Kohei Hasui

The B.E. Journal of Macroeconomics, 2021, vol. 21, issue 2, 449-472

Abstract: Recent monetary policy studies have shown that the trend productivity growth has non-trivial implications for monetary policy. This paper investigates how trend growth alters the effect of model uncertainty on macroeconomic fluctuations by introducing a robust control problem. We show that an increase in trend growth reduces the effect of the central bank’s model uncertainty and, hence, mitigates the large macroeconomic fluctuations. Moreover, the increase in trend growth contributes to bringing the economy into determinacy regions even if larger model uncertainty exists. These results indicate that trend growth contributes to stabilizing the economy in terms of both variance and determinacy when model uncertainty exists.

Keywords: model uncertainty; robust monetary policy; trend growth (search for similar items in EconPapers)
JEL-codes: E50 E52 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/bejm-2020-0133

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