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Robust Monetary Policy

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  • Adam – Nelu ALTĂR – SAMUEL

    (Romanian – American University, Bucharest, Romania)

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    Abstract

    While there is uncertainty about the data that enter into economic models and about the parameters that govern economic models, the fact that economists often approach macroeconomic data armed with different models of the economy suggests that uncertainty, or ambiguity, about the model could also be potentially important. A policy can be made “robust” to model uncertainty by designing it to perform well on average across all of the available fully specified models rather than to reign supreme in any particular model. In this paper we compare the implications of robust monetary policy versus non robust monetary policy for a model based on a new Keynesian model with two equations that represent the dynamics of inflation and the dynamics of the output gap. Using Matlab, we are able to approximate the solution to the linear–quadratic problem associated with the estimated model, thus obtaining the optimal monetary policy decision.

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    File URL: http://www.rebe.rau.ro/RePEc/rau/jisomg/FA08/JISOM-FA08-A15.pdf
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    Bibliographic Info

    Article provided by Romanian-American University in its journal Journal of Information Systems and Operation Management.

    Volume (Year): 2 (2008)
    Issue (Month): 2 (November)
    Pages: 475-486

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    Handle: RePEc:rau:jisomg:v:2:y:2008:i:2:p:475-486

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    Related research

    Keywords: robust; monetary policy;

    References

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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.:
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    1. Leitemo, Kai & Söderström , Ulf, 2004. "Robust monetary policy in the New-Keynesian framework," Research Discussion Papers 31/2004, Bank of Finland.
    2. Richard Dennis & Kai Leitemo & Ulf Söderström, 2006. "Methods for robust control," Working Paper Series 2006-10, Federal Reserve Bank of San Francisco.
    3. Giordani, Paolo & Soderlind, Paul, 2004. "Solution of macromodels with Hansen-Sargent robust policies: some extensions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2367-2397, December.
    4. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
    5. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    6. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 581-604, April.
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    Cited by:
    1. Paul Levine & Joseph Pearlman & Peter Welz, 2008. "Robust Inflation-Targeting Rules and the Gains from International Policy Coordination," School of Economics Discussion Papers 0208, School of Economics, University of Surrey.

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