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Methods for Robust Control

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  • Richard Dennis

    ()
    (Economic Research Federal Reserve Bank of San Francisco)

  • Kai Leitemo
  • Ulf Soderstrom

Abstract

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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 493.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:493

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Keywords: Robust Control; Misspecification; Optimal Policy;

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