Robust optimal policies in behavioral New Keynesian macro models

Giovanni Di Bartolomeo () and Carolina Serpieri

No 143, CIMEO Working Paper Series from Centre for Investigation and Modelling of Experimental Observations (CIMEO)

Abstract: This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectations formation used by a fraction of (boundedly rational) agents to generate their beliefs, while the rest of the population forms its expectations in a rational way. The central bank ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities.

Date: 2019-06
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00143

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