A Positive theory of monetary policy and robust control

Juha Kilponen

No 18/2003, Bank of Finland Research Discussion Papers from Bank of Finland

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)
Date: 2003
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: A positive theory of monetary policy and robust control (2004)
Working Paper: A positive theory of monetary policy and robust control (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2003_018

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