Robustly optimal monetary policy in a behavioral environment

Lahcen Bounader and Guido Traficante

No 2022.01, Working Papers from International Network for Economic Research - INFER

Abstract: This paper studies robustly optimal monetary policy in a behavioral New Keynesian model, where the private sector has myopia, while the central bank has Knightian uncertainty about the degree of myopia of the private sector and the degree of price stickiness. In such a setup the central bank solves an optimal robust monetary policy problem. We show that under uncertainty in myopia the Brainard’s attenuation principle holds, while under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive.

Keywords: Optimal monetary policy; bounded rationality; min- max; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Journal Article: Robustly Optimal Monetary Policy in a Behavioral Environment (2023)
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