Robust Optimal Policies in a Behavioural New Keynesian Model

Giovanni Di Bartolomeo () and Carolina Serpieri

No JRC111603, JRC Research Reports from Joint Research Centre

Abstract: This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework and derives robust optimal monetary policies. We build a heterogeneous agents DSGE model, where a fraction of agents behave according to some forms of bounded rationality (boundedly rational agents), while the reminder operate on the basis of expectations that are corrected on average (rational agents). We consider two potential mechanisms of expectations formation to generate beliefs. The central bank observes the aggregate economic dynamics, but it ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are then adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities. We account of model uncertainty considering both commitment and discretion regime.

Keywords: robust techniques; optimal policy; New Keynesian DSGE models; bounded rationality. (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-cbe, nep-dge, nep-mon and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:ipt:iptwpa:jrc111603

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