Monetary policy under uncertainty: Min-max vs robust-satisficing strategies
AbstractWe study monetary policy under uncertainty. A policy which ameliorates a worst case may differ from a policy which maximizes robustness and satisfices the performance. The former strategy is min-maxing and the latter strategy is robust-satisficing. We show an “observational equivalence” between robust-satisficing and min-maxing. However, there remains a “behavioral difference” between robust-satisficing and min-maxing. Policy makers often wish to respect specified bounds on target variables. The robust-satisficing policy can be more (and is never less) robust, and hence more dependable, than the min-max policy. We illustrate this in an empirical example where monetary policy making amounts to selecting the coefficients of a Taylor-type interest rate rule, subject to uncertainty in the persistence of shocks to inflation.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2007/06.
Length: 28 pages
Date of creation: 05 Dec 2007
Date of revision:
Knightian uncertainty; robustness; info-gap decision theory; monetary policy; minmax policy; robust-satisficing policy.;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-CBA-2008-03-01 (Central Banking)
- NEP-MAC-2008-03-01 (Macroeconomics)
- NEP-MON-2008-03-01 (Monetary Economics)
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