Robust Monetary Policy in the New-Keynesian Framework

Kai Leitemo and Ulf Söderström ()

No 273, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analyzing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

Date: 2004
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: ROBUST MONETARY POLICY IN THE NEW KEYNESIAN FRAMEWORK (2008)
Working Paper: Robust monetary policy in the New-Keynesian framework (2005)
Working Paper: Robust Monetary Policy in the New-Keynesian Framework (2004)
Working Paper: Robust monetary policy in the New-Keynesian framework (2004)
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