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Robust monetary policy under Knightian uncertainty

Qaisar Akram, Yakov Ben-Haim and Øyvind Eitrheim
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Yakov Ben-Haim: Israel Institute of Technology

No 414, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: We employ a new decision-theoretic approach to dealing with Knightian uncertainty based on Simon's bounded rationality. The basic tool of this approach is a quantitative answer to the question: For a specified policy, among a set of policies, how much can our assumptions regarding e.g. model and data vary, without rendering the outcome of that policy unacceptable? For a given acceptable level of performance the policymaker selects the most robust policy. We implement this approach within the context of an econometric macromodel for Norway and derive robust monetary policy rules when there is Knightian uncertainty regarding the persistence of demand and supply shocks.

Keywords: Robust monetary policy; Knightian uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2006-07-04
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