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Robust monetary policy under Knightian uncertainty

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Author Info

  • Q. Farooq Akram

    ()
    (Research Department Central Bank of Norway)

  • Yakov Ben-Haim

    (Israel Institute of Technology)

  • Øyvind Eitrheim

    (Central Bank of Norway)

Abstract

We employ a new decision-theoretic approach to dealing with Knightian uncertainty based on Simon's bounded rationality. The basic tool of this approach is a quantitative answer to the question: For a specified policy, among a set of policies, how much can our assumptions regarding e.g. model and data vary, without rendering the outcome of that policy unacceptable? For a given acceptable level of performance the policymaker selects the most robust policy. We implement this approach within the context of an econometric macromodel for Norway and derive robust monetary policy rules when there is Knightian uncertainty regarding the persistence of demand and supply shocks.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 414.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:414

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Keywords: Robust monetary policy; Knightian uncertainty;

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