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Robust Monetary Policy In The New Keynesian Framework

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Author Info
LEITEMO, KAI
S?DERSTR?M, ULF

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Abstract

We study the effects of model uncertainty in a simple New Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analyzing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the nonrobust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

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File URL: http://journals.cambridge.org/abstract_S1365100507070058
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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 12 (2008)
Issue (Month): S1 (April)
Pages: 126-135
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Handle: RePEc:cup:macdyn:v:12:y:2008:i:s1:p:126-135_07

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
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    Other versions:
  3. Leitemo , Kai & Söderström , Ulf, 2005. "Robust monetary policy in a small open economy," Research Discussion Papers 20/2005, Bank of Finland. [Downloadable!]
    Other versions:
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  5. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, EconWPA. [Downloadable!]
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  6. Mayes , David G., 2004. "An approach to bank insolvency in transition and emerging economies," Research Discussion Papers 4/2004, Bank of Finland. [Downloadable!]
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  8. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Funke & Michael Paetz, 2007. "Environmental Policy Under Model Uncertainty: A Robust Optimal Control Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Leitemo , Kai & Söderström , Ulf, 2005. "Robust monetary policy in a small open economy," Research Discussion Papers 20/2005, Bank of Finland. [Downloadable!]
    Other versions:
  3. Acocella, Nicola & Di Bartolomeo, Giovanni, 2007. "Towards a new theory of economic policy: Continuity and innovation," MPRA Paper 4419, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Richard Dennis & Kai Leitemo & Ulf Söderström, 2007. "Monetary policy in a small open economy with a preference for robustness," Working Paper Series 2007-04, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  5. Kilponen, Juha & Leitemo, Kai, 2006. "Robustness in monetary policymaking: a case for the Friedman rule," Research Discussion Papers 4/2006, Bank of Finland. [Downloadable!]
  6. Richard Dennis & Kai Leitemo & Ulf Soderstrom, 2006. "Methods for Robust Control," Working Papers 307, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  7. Meixing Dai & Eleftherios Spyromitros, 2009. "Accountability and Transparency about Central Bank Preferences for Model Robustness," Working Papers of BETA 2009-18, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  8. Meixing DAI & Eleftherios SPYROMITROS, 2007. "Walsh’s Contract and Transparency about Central Bank Preferences for Robust Control," Working Papers of BETA 2007-30, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  9. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics. [Downloadable!]
  10. Araújo, Eurilton, 2008. "Robust Monetary Policy with the Consumption-Wealth Channel," Ibmec Working Papers wpe_108, Ibmec Working Paper, Ibmec São Paulo. [Downloadable!]
  11. Miguel Casares, 2006. "A close look at model-dependent monetary policy design," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 451-470. [Downloadable!]
  12. Di Bartolomeo Giovanni & Hughes Hallett Andrew & Acocella Nicola, 2008. "Policy games, policy neutrality and Tinbergen controllability under rational expectations," wp.comunite 0034, Department of Communication, University of Teramo. [Downloadable!]
  13. Kirdan Lees, 2006. "What do robust policies look like for open economy inflation targeters?," Reserve Bank of New Zealand Discussion Paper Series DP2006/08, Reserve Bank of New Zealand. [Downloadable!]
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