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Robust Monetary Policy with the Consumption-Wealth Channel

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  • Araújo, Eurilton

Abstract

This paper studies how the central bank's concerns about model uncertainty affect the design of monetary policy in the presence of wealth effects. If all exogenous disturbances are white noises, increasing the preference for robustness or the size of wealth effects implies more aggressive policy responses to cost shocks. Under persistent shocks, numerical simulations show that increasing the preference for robustness continues to imply more aggressive responses to cost shocks. By contrast, stronger wealth effects lead to less aggressive responses, dampening the effect of model uncertainty on interest rate dynamics.

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Paper provided by Insper Working Paper, Insper Instituto de Ensino e Pesquisa in its series Insper Working Papers with number wpe_110.

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Date of creation: Oct 2008
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Handle: RePEc:ibm:ibmecp:wpe_110

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