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

Robust monetary policy in the New-Keynesian framework

  • Leitemo, Kai

    ()

    (Norwegian School of Management (BI))

  • Söderström , Ulf

    ()

    (Department of Economics and IGIER, Università Bocconi)

We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under a non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

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.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0431.pdf
Download Restriction: no

Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2004.

as
in new window

Length: 26 pages
Date of creation: 13 Oct 2004
Date of revision:
Handle: RePEc:hhs:bofrdp:2004_031
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
More information through EDIRC

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. Berger, Allen N. & Hasan, Iftekhar & Klapper, Leora F., 2004. "Further evidence on the link between finance and growth: An international analysis of community banking and economic performance," Research Discussion Papers 8/2004, Bank of Finland.
  2. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, 09.
  3. Schaling , Eric & Eijffinger , Sylvester & Tesfaselassie , Mewael, 2004. "Heterogeneous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
  4. 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.
  5. Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2004. "The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1053-1080.
  6. Guse, Eran, 2004. "Expectational business cycles," Research Discussion Papers 19/2004, Bank of Finland.
  7. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Inflation Targeting Rules," NBER Working Papers 9939, National Bureau of Economic Research, Inc.
  8. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  9. Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," Working Paper Series 83, Sveriges Riksbank (Central Bank of Sweden).
  10. Leitemo, Kai & Söderström, Ulf, 2005. "Robust Monetary Policy in a Small Open Economy," CEPR Discussion Papers 5071, C.E.P.R. Discussion Papers.
  11. Kauppi , Heikki & Koskela , Erkki & Stenbacka , Rune, 2004. "Equilibrium unemployment and investment under product and labour market imperfections," Research Discussion Papers 11/2004, Bank of Finland.
  12. Paloviita , Maritta, 2002. "Inflation dynamics in the euro area and the role of expectations," Research Discussion Papers 20/2002, Bank of Finland.
  13. Mayes , David G., 2004. "An approach to bank insolvency in transition and emerging economies," Research Discussion Papers 4/2004, Bank of Finland.
  14. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
  15. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  16. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
  17. Leitemo, Kai & Söderström , Ulf, 2004. "Robust monetary policy in the New-Keynesian framework," Research Discussion Papers 31/2004, Bank of Finland.
  18. Paloviita, Maritta & Mayes, David, 2004. "The use of real-time information in Phillips curve relationships for the euro area," Discussion Paper Series 1: Economic Studies 2004,28, Deutsche Bundesbank, Research Centre.
  19. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  20. Herrendorf, Berthold & Teixeira, Arilton, 2004. "Monopoly rights can reduce income big time," Research Discussion Papers 7/2004, Bank of Finland.
  21. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
  22. Castrén, Olli & Takalo, Tuomas & Wood, Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Working Paper Series 0406, European Central Bank.
  23. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, EconWPA.
  24. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
  25. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
  26. 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.
  27. Koskela , Erkki & Uusitalo , Roope, 2004. "Unintended convergence – how Finnish unemployment reached the European level," Research Discussion Papers 6/2004, Bank of Finland.
  28. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  29. Hyytinen, Ari & Takalo, Tuomas, 2004. "Multihoming in the Market for Payment Media: Evidence from Young Finnish Consumers," Discussion Papers 893, The Research Institute of the Finnish Economy.
  30. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  31. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
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:hhs:bofrdp:2004_031. 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: (Minna Nyman)

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.