Robust optimal monetary policies in behavioral New Keynesian DSGE models

Giovanni Di Bartolomeo () and Carolina Serpieri

No 261, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: Uncertainty is a challenge for monetary policy. This paper introduces local model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities.

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)
Pages: 45
Date: 2025-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-upt
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