A positive theory of monetary policy and robust control

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A positive theory of monetary policy and robust control

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Kilponen , Juha () (Bank of Finland Research)

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Juha Kilponen

Abstract

This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank’s model of the economy is subject to misspecifications. It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger. Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank’s model increases. This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 18/2003.

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Length: 30 pages
Date of creation: 12 Aug 2003
Date of revision:
Handle: RePEc:hhs:bofrdp:2003_018

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Paper
- Juha Kilponen, 2004. "A positive theory of monetary policy and robust control," Macroeconomics 0404014, EconWPA. [Downloadable!]
- Juha Kilponen, 2004. "A positive theory of monetary policy and robust control," Macroeconomics 0404036, EconWPA. [Downloadable!]

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
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Other versions:
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Other versions:
- J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June. [Downloadable!] (restricted)

Full references

Cited by:
(explanations, 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.)

Juha Kilponen, 2004. "Robust expectations and uncertain models – A robust control approach with application to the New Keynesian economy," GE, Growth, Math methods 0404004, EconWPA. [Downloadable!]
Other versions:
- Kilponen, Juha, 2004. "Robust expectations and uncertain models – A robust control approach with application to the New Keynesian economy," Research Discussion Papers 5/2004, Bank of Finland. [Downloadable!]
Kilponen, Juha & Leitemo, Kai, 2006. "Robustness in monetary policymaking: a case for the Friedman rule," Research Discussion Papers 4/2006, Bank of Finland. [Downloadable!]
Meixing Dai & Eleftherios Spyromitros, 2009. "Accountability and Transparency about Central Bank Preferences for Model Robustness," Working Papers of BETA 2009-18, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]

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