Robustly Optimal Monetary Policy in a Behavioral Environment

Lahcen Bounader and Guido Traficante

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 521-550

Abstract: This paper studies robustly optimal monetary policy with myopic agents in a behavioral New Keynesian model. The central bank is assumed to have Knightian uncertainty about the degree of myopia and the degree of price stickiness. We show that, under uncertainty about myopia, the Brainard’s attenuation principle holds under commitment and discretion, while, under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive. Welfare evaluation shows significant gains from a robust conduct of monetary policy when the model is distorted.

Keywords: optimal monetary policy; bounded rationality; min-max; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Robustly optimal monetary policy in a behavioral environment (2022)
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DOI: 10.1515/bejm-2022-0031

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