Optimal monetary policy under model uncertainty without commitment

Anna Orlik and Ignacio Presno
Additional contact information
Anna Orlik: https://www.federalreserve.gov/econres/anna-orlik.htm
Ignacio Presno: https://www.federalreserve.gov/econres/ignacio-presno.htm

No 13-20, Working Papers from Federal Reserve Bank of Boston

Abstract: This paper studies the design of optimal time-consistent monetary policy in an economy where the planner trusts its own model, while a representative household uses a set of alternative probability distributions governing the evolution of the exogenous state of the economy. In such environments, unlike in the original studies of time-consistent monetary policy, managing households' expectations becomes an active channel of optimal policymaking per se, a feature that the paternalistic government seeks to exploit. We adapt recursive methods in the spirit of Abreu, Pearce, and Stacchetti (1990) as well as computational algorithms based on Judd, Yeltekin, and Conklin to fully characterize the equilibrium outcomes for a class of policy games between the government and a representative household that distrusts the model used by the government.

Keywords: monetary policy; government credibility; time consistency; recursive methods; model uncertainty; robust control (search for similar items in EconPapers)
JEL-codes: C61 D81 E52 E61 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-10-27
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