Managing uncertainty through robust-satisficing monetary policy

Qaisar Akram, Yakov Ben-Haim and Øyvind Eitrheim
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Yakov Ben-Haim: Technion - Israel Institute of Technology

No 2006/10, Working Paper from Norges Bank

Abstract: We employ information-gap decision theory to derive a robust monetary policy response to Knightian parameter uncertainty. This approach provides a quantitative answer to the question: For a specified policy, how much can our models and data err or vary, without rendering the outcome of that policy unacceptable to a policymaker? For a given acceptable level of performance, the policymaker selects the policy that delivers acceptable performance under the greatest range of uncertainty. We show that such information-gap robustness is a proxy for probability of policy success. Hence, policies that are likely to succeed can be identified without knowing the probability distribution. We adopt this approach to investigate empirically the robust monetary policy response to a supply shock with an uncertain degree of persistence.

Keywords: Knightian uncertainty; Monetary policy; Info-gap decision theory. (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2006-10-23
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2006_10

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