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Robust Monetary Policy

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  • Adam – Nelu Altăr-Samuel

    (Romanian American University)

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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/journl/SU08/REBE-SU08-A2.pdf
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    Bibliographic Info

    Article provided by Romanian-American University in its journal Romanian Economic and Business Review.

    Volume (Year): 3 (2008)
    Issue (Month): 2 (June)
    Pages: 19-28

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    Handle: RePEc:rau:journl:v:3:y:2008:i:2:p:19-28

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    Related research

    Keywords: monetary policy; uncertainty; optimal policy; economic models;

    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. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 0014, European Central Bank.
    2. Giordani, Paolo & Söderlind, Paul, 2002. "Solution of Macromodels with Hansen-Sargent Robust Policies: Some Extensions," Working Paper Series in Economics and Finance 499, Stockholm School of Economics, revised 15 May 2003.
    3. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2006. "Methods for Robust Control," CEPR Discussion Papers 5638, C.E.P.R. Discussion Papers.
    4. 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.
    5. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 126-135, April.
    6. 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.
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