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A Positive theory of monetary policy and robust control

Juha Kilponen ()

No 18/2003, Research Discussion Papers from Bank of Finland

Abstract: This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank's model of the economy is subject to misspecifications.It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger.Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank's model increases.This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be. Key words: risk-sensitivity, robust control theory, monetary policy, Brainard conservatism, model uncertainty JEL classification numbers: E58

JEL-codes: E58 (search for similar items in EconPapers)
Date: 2003-08-12
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Working Paper: A positive theory of monetary policy and robust control (2004) Downloads
Working Paper: A positive theory of monetary policy and robust control (2004) Downloads
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