Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy

Alexei Onatski () and James Stock

No 7490, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines monetary policy in Rudebusch and Svensson's (1999) two equation macroeconomic model when the policymaker recognizes that the model is an approximation and is uncertain about the quality of that approximation. It is argued that the minimax approach of robust control provides a general and tractable alternative to the conventional Bayesian decision theoretic approach. Robust control techniques are used to construct robust monetary policies. In most (but not all) cases, these robust policies are more aggressive than the optimal policies absent model uncertainty. The specific robust policies depend strongly on the formation of model uncertainty used, and we make some suggestions about which formulation is most relevant for monetary policy applications.

JEL-codes: C53 E58 (search for similar items in EconPapers)
Date: 2000-01
New Economics Papers: this item is included in nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (43)

Published as Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
Published as Onatski, Alexei & Stock, James H., 2002. "Robust Monetary Policy Under Model Uncertainty In A Small Model Of The U.S. Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 85-110, February.

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Journal Article: ROBUST MONETARY POLICY UNDER MODEL UNCERTAINTY IN A SMALL MODEL OF THE U.S. ECONOMY (2002)
Journal Article: Robust monetary policy under model uncertainty in a small model of the U.S. economy (1999)
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