Robust Monetary Policy in the New-Keynesian Framework

Söderström, Ulf and Kai Leitemo

No 4805, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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, analysing 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; Min-max policies (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: ROBUST MONETARY POLICY IN THE NEW KEYNESIAN FRAMEWORK (2008)
Working Paper: Robust monetary policy in the New-Keynesian framework (2005)
Working Paper: Robust Monetary Policy in the New-Keynesian Framework (2004)
Working Paper: Robust monetary policy in the New-Keynesian framework (2004)
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