Robust Optimal Monetary Policies in Behavioral New Keynesian DSGE Models

Di Bartolomeo Giovanni () and Serpieri Carolina ()
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Di Bartolomeo Giovanni: Department of Economics and Law, Sapienza University of Rome, Rome, Italy
Serpieri Carolina: Department of Economics and Law, Sapienza University of Rome, Rome, Italy

The B.E. Journal of Macroeconomics, 2025, vol. 25, issue 1, 147-189

Abstract: This paper addresses the challenge of uncertainty in monetary policy by incorporating local model uncertainty arising from heterogeneous expectations into a behavioral New Keynesian DSGE framework. Non-Bayesian control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities to derive robust optimal policies. In the context of uncertainty regarding the formation of behavioral expectations, the importance of gradualism in monetary adjustments is emphasized. Policymakers should consider the ratio of rational to boundedly rational agents and anticipate that a significant presence of boundedly rational agents, especially those with long-horizon expectations, may require more dynamic adjustments to interest rates. Accounting for multidimensional uncertainty exponentially increases the complexity of the analysis and model indeterminacy.

Keywords: Brainard principle; monetary policy; bounded rationality; expectation formation; non-Bayesian robust control (search for similar items in EconPapers)
JEL-codes: D84 E52 E58 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/bejm-2024-0093

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