Monetary policy under uncertainty: Min-max vs robust-satisficing strategies

Yakov Ben-Haim (), Q. Farooq Akram and Øyvind Eitrheim
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Yakov Ben-Haim: Technion-Israel Institute of Technology

No 2007/06, Working Paper from Norges Bank

Abstract: We study monetary policy under uncertainty. A policy which ameliorates a worst case may differ from a policy which maximizes robustness and satisfices the performance. The former strategy is min-maxing and the latter strategy is robust-satisficing. We show an “observational equivalence” between robust-satisficing and min-maxing. However, there remains a “behavioral difference” between robust-satisficing and min-maxing. Policy makers often wish to respect specified bounds on target variables. The robust-satisficing policy can be more (and is never less) robust, and hence more dependable, than the min-max policy. We illustrate this in an empirical example where monetary policy making amounts to selecting the coefficients of a Taylor-type interest rate rule, subject to uncertainty in the persistence of shocks to inflation.

Keywords: Knightian uncertainty; robustness; info-gap decision theory; monetary policy; minmax policy; robust-satisficing policy. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-12-05

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Persistent link: http://EconPapers.repec.org/RePEc:bno:worpap:2007_06

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