Robustifying optimal monetary policy using simple rules as cross-checks

Pelin Ilbas (), Øistein Røisland () and Tommy Sveen ()
Additional contact information
Pelin Ilbas: National Bank of Belgium, Research Department
Øistein Røisland: Norges Bank

No 245, Working Paper Research from National Bank of Belgium

Abstract: There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.

Keywords: Model uncertainty; Optimal control; Simple rules (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Robustifying optimal monetary policy using simple rules as cross-checks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201311-245

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