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Robust monetary policy with the consumption-wealth channel

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Listed author(s):
  • Araújo, Eurilton

Abstract

This paper studies how the central bank's concerns about model uncertainty affect the design of monetary policy in the presence of wealth effects. If all exogenous disturbances are white noises, increasing the preference for robustness or the size of wealth effects implies more aggressive policy responses to cost shocks. Under persistent shocks, numerical simulations show that increasing the preference for robustness continues to imply more aggressive responses to cost shocks. By contrast, stronger wealth effects lead to less aggressive responses, dampening the effect of model uncertainty on interest rate dynamics.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165188912001856
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 296-311

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:296-311
DOI: 10.1016/j.jedc.2012.09.001
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

Keywords: Optimal monetary policy; Robustness; Wealth effects;

Other versions of this item:

Find related papers by JEL classification:
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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