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Robust monetary policy in the New-Keynesian framework

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Author Info

  • Leitemo, Kai

    ()
    (Norwegian School of Management (BI))

  • Söderström , Ulf

    ()
    (Department of Economics and IGIER, Università Bocconi)

Abstract

We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under a non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0431.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2004.

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Length: 26 pages
Date of creation: 13 Oct 2004
Date of revision:
Handle: RePEc:hhs:bofrdp:2004_031

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: Knightian uncertainty; model uncertainty; robust control; min-max policies;

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References

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