ROBUST MONETARY POLICY UNDER MODEL UNCERTAINTY IN A SMALL MODEL OF THE U.S. ECONOMY

Alexei Onatski () and James H. Stock

Macroeconomic Dynamics, 2002, vol. 6, issue 1, 85-110

Abstract: This paper examines monetary policy in a two-equation macroeconomic model when the policymaker recognizes that the model is an approximation and is uncertain about the quality of that approximation. It is argued that the minimax approach of robust control provides a general and tractable alternative to the conventional Bayesian decision theoretic approach. Robust control techniques are used to construct robust monetary policies. In most (but not all) cases, these robust policies are more aggressive than the optimal policies absent model uncertainty. The specific robust policies depend strongly on the formulation of model uncertainty used, and we make some suggestions about which formulation is most relevant for monetary policy applications.

Date: 2002
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Related works:
Working Paper: Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy (2000)
Journal Article: Robust monetary policy under model uncertainty in a small model of the U.S. economy (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:6:y:2002:i:01:p:85-110_02

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