Robust monetary rules under unstructured model uncertainty

Paul Levine () and Joseph Pearlman

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 3, 456-471

Abstract: This paper revisits a widely adopted approach to robust decision making developed by (Hansen and Sargent, 2003) and (Hansen and Sargent, 2008)--henceforth HS--and applies it to monetary policy design in the face of model uncertainty. We pay particular attention to two issues: first, we distinguish three possible forms of the implied game between malign nature and the policymaker in the HS procedure each leading to a different robust and approximating equilibria. Second, we impose the zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint has serious consequences for a policymaker pursuing HS-type robustness, especially when accompanied by an inability to commit.

Keywords: Robustness; Unstructured; uncertainty; Commitment; Zero; lower; bound; interest; rate; constraint (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:3:p:456-471

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