Robust monetary policy with the consumption-wealth channel

Eurilton Araújo

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 1, 296-311

Abstract: This paper studies how the central bank's concerns about model uncertainty affect the design of monetary policy in the presence of wealth effects. If all exogenous disturbances are white noises, increasing the preference for robustness or the size of wealth effects implies more aggressive policy responses to cost shocks. Under persistent shocks, numerical simulations show that increasing the preference for robustness continues to imply more aggressive responses to cost shocks. By contrast, stronger wealth effects lead to less aggressive responses, dampening the effect of model uncertainty on interest rate dynamics.

Keywords: Optimal monetary policy; Robustness; Wealth effects (search for similar items in EconPapers)
JEL-codes: E21 E52 E58 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Robust Monetary Policy with the Consumption-Wealth Channel (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:1:p:296-311

DOI: 10.1016/j.jedc.2012.09.001

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