Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model

Michael Woodford and Klaus Adam

No 8826, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have 'rational expectations'.

Keywords: Belief distortions; Near-rational expectations; Robust control; Target criterion (search for similar items in EconPapers)
JEL-codes: D81 D84 E52 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (48)

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Journal Article: Robustly optimal monetary policy in a microfounded New Keynesian model (2012)
Working Paper: Robustly optimal monetary policy in a microfounded new Keynesian model (2012)
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