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Robust Monetary Policy in a Currency Union

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  • Olga Kuznetsova

    ()
    (Laboratory for Macroeconomic Analysis, National Research University Higher School of Economics, Moscow, Russia)

Abstract

A great number of recent researches have found importance of country specific shocks for optimal monetary policy construction in the context of a currency union. This however has been almost completely overlooked by the analysis of optimal monetary policy under model uncertainty. The main purpose of our work is to fill this gap. By using a model of a two-country currency union with sticky prices, we have derived robust monetary policy that works reasonably well even in the worst case of model perturbations. We find some anti-attenuation effect of uncertainty, and show that the central bank’s optimal reaction to economic shocks becomes more aggressive with an increase in the extent of misspecification.

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Bibliographic Info

Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

Volume (Year): 59 (2012)
Issue (Month): 2 (May)
Pages: 185-199

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Handle: RePEc:voj:journl:v:59:y:2012:i:2:p:185-199

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Web page: http://www.panoeconomicus.rs/

Related research

Keywords: Model uncertainty; Robust monetary policy; Currency union;

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References

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  1. Jordi Gali & Tommaso Monacelli, 2005. "Optimal Monetary and Fiscal Policy in a Currency Union," NBER Working Papers 11815, National Bureau of Economic Research, Inc.
  2. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and Fiscal Policy Interactions in a Micro-Funded Model of a Monetary Union," CEPR Discussion Papers 3591, C.E.P.R. Discussion Papers.
  3. Vermeulen, Philip & Dias, Daniel & Dossche, Maarten & Gautier, Erwan & Hernando, Ignacio & Sabbatini, Roberto & Stahl, Harald, 2007. "Price setting in the euro area: some stylised facts from individual producer price data," Working Paper Series 0727, European Central Bank.
  4. Ferrero, Andrea, 2009. "Fiscal and monetary rules for a currency union," Journal of International Economics, Elsevier, vol. 77(1), pages 1-10, February.
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  7. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  8. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
  9. Richard Dennis, 2001. "Optimal policy in rational-expectations models: new solution algorithms," Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  10. Pierpaolo Benigno & J. David López-Salido, 2002. "Inflation persistence and optimal monetary policy in the Euro Area," Banco de Espa�a Working Papers 0215, Banco de Espa�a.
  11. Christopher A. Sims, 2001. "Pitfalls of a Minimax Approach to Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 51-54, May.
  12. Kurozumi, Takushi, 2010. "Optimal Monetary Policy Under Parameter Uncertainty In A Simple Microfounded Model," Macroeconomic Dynamics, Cambridge University Press, vol. 14(02), pages 257-268, April.
  13. Alexei Onatski, 2000. "Minimax Analysis of Monetary Policy Under Model Uncertainty," Econometric Society World Congress 2000 Contributed Papers 1818, Econometric Society.
  14. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 593-612, November.
  15. 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.
  16. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  17. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
  18. Herve Le Bihan & Jean-Guillaume Sahuc, 2002. "Implications of parameter uncertainty for monetary policy in a simple Euro area model," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 553-556.
  19. De Grauwe, Paul & Senegas, Marc-Alexandre, 2006. "Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?," European Journal of Political Economy, Elsevier, vol. 22(4), pages 787-808, December.
  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  21. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, vol. 128(1), pages 45-90, May.
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