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Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model

  • Adam, Klaus
  • Woodford, Michael

We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have 'rational expectations'.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8826.

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Date of creation: Feb 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:8826
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  1. Michael Woodford & Marc P. Giannoni, 2010. "Optimal Target Criteria for Stabilization Policy," 2010 Meeting Papers 932, Society for Economic Dynamics.
  2. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," NBER Working Papers 10838, National Bureau of Economic Research, Inc.
  3. Michael Woodford, 2005. "Robustly Optimal Monetary Policy with Near Rational Expectations," NBER Working Papers 11896, National Bureau of Economic Research, Inc.
  4. Klaus Adam & Roberto M. Billi, 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Research Working Paper RWP 05-08, Federal Reserve Bank of Kansas City.
  5. Benigno, Pierpaolo & Paciello, Luigi, 2014. "Monetary policy, doubts and asset prices," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 85-98.
  6. Timothy Cogley & Riccardo Colacito & Lars Peter Hansen & Thomas J. Sargent, 2008. "Robustness and U.S. Monetary Policy Experimentation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1599-1623, December.
  7. Adam, Klaus & Billi, Roberto M, 2003. "Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates," CEPR Discussion Papers 4111, C.E.P.R. Discussion Papers.
  8. Li-Lin Ku & Chien-Pai Han, 2008. "Robust testing procedures of process locations," Quality & Quantity: International Journal of Methodology, Springer, vol. 42(5), pages 579-595, October.
  9. Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
  10. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  11. Hans, Erwin & Wullink, Gerhard & van Houdenhoven, Mark & Kazemier, Geert, 2008. "Robust surgery loading," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1038-1050, March.
  12. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Robust estimation and control under commitment," Journal of Economic Theory, Elsevier, vol. 124(2), pages 258-301, October.
  13. Lars Peter Hansen & Thomas J. Sargent, 2008. "Â Time Inconsistency of Robust Control?," Chapters, in: Macroeconomics in the Small and the Large, chapter 7 Edward Elgar.
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