Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent, 2005, and Giordani and Soderlind, 2004). In this paper we show that the structural-form methods developed by Dennis (2005a) to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in a state-space form. Interestingly, state-space and structural-form methods do not necessarily return the same equilibria for robust control problems. We apply both state-space and structural solution methods to an empirical New Keynesian business cycle model and find that the differences between the methods are both qualitatively and quantitatively important. In particular, with the structural-form solution methods the specification errors generally involve changes to the conditional variances in addition to the conditional means of the shock processes
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
493.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:493
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Richard Dennis & Kai Leitemo & Ulf Soderstrom, 2006.
"Methods for Robust Control,"
Working Papers
307, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis 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
References listed on IDEAS 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.:
Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983.
"Exogeneity,"
Econometrica,
Econometric Society, vol. 51(2), pages 277-304, March.
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