Robust monetary policy in a small open economy

Kai Leitemo and Ulf Söderström

No 20/2005, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper studies how a central bank's preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy.Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyse the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate.We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.

Keywords: Knightian uncertainty; min-max policies; model uncertainty and robust control (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Robust monetary policy in a small open economy (2008)
Working Paper: Robust Monetary Policy in a Small Open Economy (2005)
Working Paper: Robust Monetary Policy in a Small Open Economy (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2005_020

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