Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy and Model Uncertainty in a Small Open Economy


Author Info

  • Richard Dennis
  • Kai Leitemo
  • Ulf Söderström


We study the effects of optimized monetary policy in a semi-structural, estimated small open economy in situations where the policymaker has either complete or less than complete confidence in the model being free from misspecification errors. We use the robust control techniques developed by Dennis, Leitemo and Söderström (2006). We find that irrespective of the level of confidence to the model, the central bank may reduce loss by more than 80% by making a policy commitment. It is the open-economy channels introduce trade-offs in which commitment enhances policy outcome. If the policymaker lacks confidence in the model specification, a robust policymaker mainly fears that the exchange rate and domestic inflation equations are misspecified. Consequently, the robust policy is designed primarily to counteract these types of potential misspecifications. Policy becomes more aggressive towards all shocks. Although the exchange rate equation provides great opportunities for worst-case distortions, the exchange rate channels also provide ample ways in which policy can counteract distortions to the model, especially under policy commitment. The exchange rate channels can hence be viewed as both a curse and a blessing to the policymaker.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 14.

as in new window
Date of creation: 04 Jul 2006
Date of revision:
Handle: RePEc:sce:scecfa:14

Contact details of provider:
Web page:
More information through EDIRC

Related research

Keywords: Policy robustness; monetary policy rules; model uncertainty;

Find related papers by JEL classification:


No references listed on IDEAS
You can help add them by filling out this form.



This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:14. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.