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Robust versus Optimal Rules in Monetary Policy: A Note

  • M. Demertzis
  • A.F. Tieman

We provide a framework for analysing the choice between optimal and robust rules in the presence of paradigm uncertainty in monetary policy. We thus provide two issues: first, we discuss the conditions of uncertainty that render a robust rule a preferable substitute to optimal rules and second, we show how the degree of risk aversion increases the desirability of robust rules.

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File URL: http://www.dnb.nl/binaries/wo0701_tcm46-145997.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 701.

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Date of creation: 2002
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Handle: RePEc:dnb:wormem:701
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Levin, Andrew & Wieland, Volker & Williams, John C., 2003. "The performance of forecast-based monetary policy rules under model uncertainty," CFS Working Paper Series 2003/06, Center for Financial Studies (CFS).
  2. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  3. Holtham, Gerald & Hughes Hallett, Andrew, 1992. "International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model: Comment," American Economic Review, American Economic Association, vol. 82(4), pages 1043-51, September.
  4. Frankel, Jeffrey A & Rockett, Katharine E, 1988. "International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model," American Economic Review, American Economic Association, vol. 78(3), pages 318-40, June.
  5. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  6. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, 07.
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