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Robustly optimal monetary policy with near-rational expectations

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  • Woodford, Michael

Abstract

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely modelconsistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more historydependent than if rational expectations are assumed. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2007/12.

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Date of creation: 2005
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Handle: RePEc:zbw:cfswop:200712

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Keywords: Optimal Monetary Policy; Commitment; History-Dependent Policy;

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  1. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  2. Vitor Gaspar & Frank Smets & David Vestin, 2006. "Optimal Monetary Policy under Adaptive Learning," Computing in Economics and Finance 2006, Society for Computational Economics 183, Society for Computational Economics.
  3. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Econometrica, Econometric Society, Econometric Society, vol. 79(1), pages 47-73, 01.
  4. Honkapohja, S. & Evans, G.W., 2000. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Helsinki, Department of Economics, Department of Economics 481, Department of Economics.
  5. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2004. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Carlo Alberto Notebooks, Collegio Carlo Alberto 12, Collegio Carlo Alberto, revised 2006.
  6. Michael Woodford, 2005. "Robustly optimal monetary policy with near-rational expectations," Discussion Papers, Columbia University, Department of Economics 0506-13, Columbia University, Department of Economics.
  7. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  8. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-27, Board of Governors of the Federal Reserve System (U.S.).
  9. Svec, Justin, 2012. "Optimal fiscal policy with robust control," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(3), pages 349-368.
  10. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(5), pages 1406-1435, July.
  11. Vitor Gaspar & Frank Smets, 2005. "Monetary Policy under Adaptive Learning," Computing in Economics and Finance 2005, Society for Computational Economics 80, Society for Computational Economics.
  12. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
  13. Michael Woodford, 2006. "An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(2-3), pages 386-395, 04-05.
  14. M. H. Khalil Timamy, 2005. "Debate," Review of African Political Economy, Taylor & Francis Journals, vol. 32(104-105), pages 383-393, June.
  15. Anastasios G. Karantounias, 2009. "Ramsey Taxation and fear of misspecification," 2009 Meeting Papers, Society for Economic Dynamics 822, Society for Economic Dynamics.
  16. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Robust estimation and control under commitment," Journal of Economic Theory, Elsevier, Elsevier, vol. 124(2), pages 258-301, October.
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