Robust monetary policy under Knightian uncertainty
AbstractWe 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 InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 414.
Date of creation: 04 Jul 2006
Date of revision:
Robust monetary policy; Knightian uncertainty;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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