Robust monetary policy with competing reference models

Andrew Levin () and John Williams

No 2003-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The literature on robust monetary policy rules has largely focused on the case in which the policymaker has a single reference model while the true economy lies within a specified neighborhood of the reference model. In this paper, we show that such rules may perform very poorly in the more general case in which non-nested models represent competing perspectives about controversial issues such as expectations formation and inflation persistence. Using Bayesian and minimax strategies, we then consider whether any simple rule can provide robust performance across such divergent representations of the economy. We find that a robust outcome is attainable only in cases where the objective function places substantial weight on stabilizing both output and inflation; in contrast, we are unable to find a robust policy rule when the sole policy objective is to stabilize inflation. We analyze these results using a new diagnostic approach, namely, by quantifying the fault tolerance of each model economy with respect to deviations from optimal policy.

Keywords: Monetary policy; Econometric models; Inflation (Finance) (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (207)

Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp03-10bk.pdf (application/pdf)

Related works:
Journal Article: Robust monetary policy with competing reference models (2003)
Working Paper: Robust Monetary Policy with Competing Reference Models (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2003-10

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().