IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Robust control and central banking behaviour

  • Olalla, Myriam García
  • Gómez, Alejandro Ruiz
Registered author(s):

    This paper seeks to explain the recent behaviour of the two main central banks in the recent financial crisis, applying a robust control tool through a Neo-Keynesian monetary policy model. The direct forbearer of this paper is the Giordani and Söderlind (2004) study. It begins with the origin, purpose and theoretical grounds of robust control, indicating that it is one way to face model uncertainty, as an alternative to the Bayesian approach. In the middle section, we seek to obtain the course of the model's main variables: interest rates, inflation and output. The model constructor also wants the participating agents to have the same doubts that he has regarding its validity; therefore, robust control is considered as a "fine-tuning" of the rational expectations approach. The impulse-response functions are obtained, with the monetary authority acting as a Stackelberg-type leader, affected by a perturbation on the supply side. The two relevant equilibria are obtained and compared in robust control with dynamic economy (the reference equilibrium and the worst possible case equilibrium) with that obtained when operating with rational expectations. The alternative course for the reference model set forth in the paper by Dennis (2008) is also analysed. We mainly find that the different results depend on the behaviour of the law of motion of the state variables, specifically the shadow prices that influence the private sector's expectations. Lastly, the paper relates the recent monetary policy performance when facing the financial crisis that began in the summer of 2007.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/B6VB1-5288P3V-2/2/aefa324192e241ca958aae97790ebd92
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 28 (2011)
    Issue (Month): 3 (May)
    Pages: 1265-1278

    as
    in new window

    Handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:1265-1278
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

    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.:

    as in new window
    1. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 873-907, October.
    2. Andrew Levin & Volker Wieland & John C. Williams, 2003. "The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty," American Economic Review, American Economic Association, vol. 93(3), pages 622-645, June.
    3. Dennis, Richard, 2010. "How robustness can lower the cost of discretion," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 653-667, September.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    5. Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
    6. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
    7. Becker, R. & Hall, S. & Rustem, B., 1994. "Robust optimal decisions with stochastic nonlinear economic systems," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 125-147, January.
    8. Woodford, Michael, 2005. "Robustly optimal monetary policy with near-rational expectations," CFS Working Paper Series 2007/12, Center for Financial Studies (CFS).
    9. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Paper Series 2005-19, Federal Reserve Bank of San Francisco.
    10. Otmar Issing, 2002. "Monetary policy in a changing economic environment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 183-205.
    11. Hansen, Lars Peter & Sargent, Thomas J. & Wang, Neng E., 2002. "Robust Permanent Income And Pricing With Filtering," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 40-84, February.
    12. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    13. Buiter, Willem H., 2008. "Central banks and financial crises," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 495-633.
    14. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
    15. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    16. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
    17. Robert J. Tetlow & Peter von zur Muehlen, 2000. "Robust monetary policy with misspecified models: does model uncertainty always call for attenuated policy?," Finance and Economics Discussion Series 2000-28, Board of Governors of the Federal Reserve System (U.S.).
    18. Levine, Paul & Currie, David, 1985. "Optimal feedback rules in an open economy macromodel with rational expectations," European Economic Review, Elsevier, vol. 27(2), pages 141-163, March.
    19. Carl E. Walsh, 2004. "Precautionary policies," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb.13.
    20. Giordani, Paolo & Soderlind, Paul, 2004. "Solution of macromodels with Hansen-Sargent robust policies: some extensions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2367-2397, December.
    21. Richard Dennis, 2000. "Solving for optimal simple rules in rational expectations models," Working Paper Series 2000-14, Federal Reserve Bank of San Francisco.
    22. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc.
    23. Hansen, Lars Peter & Sargent, Thomas J., 1993. "Seasonality and approximation errors in rational expectations models," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 21-55.
    24. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 581-604, April.
    25. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 235-322.
    26. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
    27. Catarina Roseta-Palma & Anastasios Xepapadeas, 2004. "Robust Control in Water Management," Journal of Risk and Uncertainty, Springer, vol. 29(1), pages 21-34, 07.
    28. Ben Martin, 1999. "Caution and gradualism in monetary policy under uncertainty," Bank of England working papers 105, Bank of England.
    29. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    30. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
    31. Sims, Christopher A., 1993. "Rational expectations modeling with seasonally adjusted data," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 9-19.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:1265-1278. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.