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Robustly optimal monetary policy in a microfounded new Keynesian model

Klaus Adam () and Michael Woodford ()

No 12-01, Working Papers from University of Mannheim, Department of Economics

Abstract: We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have “rational expectations.

Keywords: robust control; near-rational expectations; belief distortions; target criterion (search for similar items in EconPapers)
JEL-codes: D81 D84 E52 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-mon
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Journal Article: Robustly optimal monetary policy in a microfounded New Keynesian model (2012) Downloads
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