A positive theory of monetary policy and robust control

Juha Kilponen

Macroeconomics from University Library of Munich, Germany

Abstract: This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank’s model of the economy is subject to misspecifications. It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger. Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank’s model increases. This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be.

Keywords: risk-sensitivity; robust control theory; monetary policy; Brainard conservatism; model uncertainty (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2004-04-19
New Economics Papers: this item is included in nep-mon
Note: Type of Document - pdf; pages: 26
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0404014

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