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A positive theory of monetary policy and robust control Author info | Abstract | Publisher info | Download info | Related research | Statistics Juha Kilponen (Bank of Finland)
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This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank’s model of the economy is subject to misspecifications. It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger. Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank’s model increases. This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be.
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Paper provided by EconWPA in its series Macroeconomics with number
0404036.
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Date of creation: 29 Apr 2004Date of revision:
Handle: RePEc:wpa:wuwpma:0404036Note: Type of Document - pdfContact details of provider: Web page: http://129.3.20.41
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Keywords: risk-sensitivity ; robust control theory ; monetary policy ; Brainard conservatism ; model uncertainty ; Other versions of this item:
Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports :
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.: repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
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references Cited by : (explanations , 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.)
Kilponen, Juha, 2004.
"Robust expectations and uncertain models – A robust control approach with application to the New Keynesian economy ,"
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5/2004, Bank of Finland.
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Other versions: Kilponen, Juha & Leitemo, Kai, 2006.
"Robustness in monetary policymaking: a case for the Friedman rule ,"
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4/2006, Bank of Finland.
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Meixing Dai & Eleftherios Spyromitros, 2009.
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