Minimax Analysis of Monetary Policy Under Model Uncertainty
AbstractRecently there have been several studies that examined monetary policy under model uncertainty. These studies formulated uncertainty in a number of different ways. One of the prominent ways to formulate model uncertainty is to form a non-parametric set of perturbations around some nominal model where the set is structured so that the uncertainty is focused on potentially important weaknesses of the model. Unfortunately, previous efforts were unable to compute exact optimal policy rules under this general formulation of uncertainty. Moreover, for those special cases when the robust rules were computed, the degree of their aggressiveness was often counterintuitive in light of conventional Brainard/Bayesian wisdom that policy under uncertainty should be conservative. This paper,therefore, consists of three different exercises concerning minimax analysis of policy rules under model uncertainty. First, the minimax approach is compared with the Bayesian one in a stylized Brainard (1967) setting. Strong similarities between recommendations of the two approaches are found. Next, a more realistic setting such as in Onatski and Stock (1999) is considered. A characterization of the worst possible models corresponding to the max part of the minimax scheme is given. It is shown that the worst possible models for very aggressive rules, such as the H-infinity rule, have realistic economic structure whereas those for passive rules, such as the actual Fed's policy, are not plausible. Thus, the results of minimax analysis presented in Onatski and Stock (1999) might be biased against the passive rules. Finally, exact optimal minimax policy rules for the case of slowly time-varying uncertainty in the case of the Rudebusch and Svensson's (1998) model are computed. The optimal rule under certainty turns out to be robust to moderate deviations from Rudebusch and Svensson's model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1818.
Date of creation: 01 Aug 2000
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998.
"Policy Rules for Inflation Targeting,"
NBER Working Papers
6512, National Bureau of Economic Research, Inc.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
- Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
- Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
- Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
- Onatski, Alexei & Stock, James H., 2002.
"Robust Monetary Policy Under Model Uncertainty In A Small Model Of The U.S. Economy,"
Cambridge University Press, vol. 6(01), pages 85-110, February.
- Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
- Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
- Olga Kuznetsova, 2012. "Robust Monetary Policy in a Currency Union," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 185-199, May.
- Stefano Eusepi, 2004. "Does Central Bank Transparency Matter for Economic Stability," Computing in Economics and Finance 2004 176, Society for Computational Economics.
- Adam, Klaus, 2003.
"On the Relation between Robust and Bayesian Decision Making,"
CFS Working Paper Series
2003/02, Center for Financial Studies (CFS).
- Adam, Klaus, 2004. "On the relation between robust and Bayesian decision making," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2105-2117, September.
- Klaus Adam, 2001. "On the Relation between Robust and Bayesian Decision Making," CSEF Working Papers 68, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.