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Woodford'S Approach To Robust Policy Analysis In A Linear-Quadratic Framework

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  • Kwon, Hyosung
  • Miao, Jianjun

Abstract

This paper extends Woodford's approach to the robustly optimal monetary policy to a general linear quadratic framework. We provide algorithms to solve for a time-invariant linear robustly optimal policy in a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretion. We apply our methods to a New Keynesian model of monetary policy with persistent cost-push shocks and inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation when inflation is more persistent.

Suggested Citation

  • Kwon, Hyosung & Miao, Jianjun, 2019. "Woodford'S Approach To Robust Policy Analysis In A Linear-Quadratic Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1895-1920, July.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:05:p:1895-1920_00
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    2. Kwon, Hyosung & Miao, Jianjun, 2017. "Three types of robust Ramsey problems in a linear-quadratic framework," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 211-231.
    3. Hengjie Ai & Ravi Bansal, 2016. "Risk Preferences and The Macro Announcement Premium," NBER Working Papers 22527, National Bureau of Economic Research, Inc.
    4. Michael Woodford, 2013. "Macroeconomic Analysis Without the Rational Expectations Hypothesis," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 303-346, May.

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