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Robust Control and Persistence in the New Keynesian Economy

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Author Info
Michael Paetz ()

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Abstract

Since Keynes no economist would deny that expectations under uncer- tain conditions matter for the conduct of monetary policy, but still opin- ions about their formation are diverse. We build a hybrid New Keynesian Framework to analyze the influence of model uncertainty on optimal in- terest rates under di¤erent degrees of rational forward-looking behavior, using recently developed robust control techniques. Impulse response functions illustrate that uncertainty seems to be a rationale for more aggressive interest rate reactions, but also suggest that the degree of forward-looking behavior seems to be more important than an appro- priate fear about the misspecification of a given model. Furthermore, we argue that assuming to control inflation through expectations is a policy on the razor's edge, since robust expectations overestimate shock impacts. This questions the gains from commitment under uncertainty.

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Publisher Info
Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20711.

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Date of creation: Oct 2007
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Handle: RePEc:ham:qmwops:20711

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Related research
Keywords: Robust Control; Knightian Uncertainty; Monetary Policy; Forward-Looking Expectations; Model Uncertainty.;

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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