Robust monetary policy under model uncertainty and inflation persistence

Li Qin, Moïse Sidiropoulos () and Eleftherios Spyromitros
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Li Qin: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique
Moïse Sidiropoulos: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, Aristotle University of Thessaloniki

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Abstract: In this paper, we examine the inflation persistence puzzle by applying the robust control approach of Hansen and Sargent (2008). In line with the literature suggesting that inflation persistence may be affected by the monetary policy design and its institutional characteristics, we find that inflation persistence is positively related to the central bank's preference for model robustness. In effect, model uncertainty and robust decision making may be considered as a mechanism generating inflation persistence, for a given non-zero degree of autocorrelation in supply-side shocks. Further, the policy implication is that the central bank's monetary policy under model uncertainty renders, in terms of the sacrifice ratio, the output-cost of inflation stabilization more important.

Keywords: Optimal monetary policy; Inflation persistence; Robust control (search for similar items in EconPapers)
Date: 2013-01
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Citations: View citations in EconPapers (5)

Published in Economic Modelling, 2013, 30, pp.721-728. ⟨10.1016/j.econmod.2012.10.012⟩

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Related works:
Journal Article: Robust monetary policy under model uncertainty and inflation persistence (2013)
Working Paper: Robust Monetary Policy under Model Uncertainty and Inflation Persistence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03692269

DOI: 10.1016/j.econmod.2012.10.012

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