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Robust monetary policy in a small open economy

  • Leitemo , Kai

    ()

    (Norwegian School of Management (BI))

  • Söderström , Ulf

    ()

    (Department of Economics and IGIER, Università Bocconi)

This paper studies how a central bank’s preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically solve the optimal robust policy rule, and separately ana-lyze the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0520netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/2005.

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Length: 58 pages
Date of creation: 11 Oct 2005
Date of revision:
Handle: RePEc:hhs:bofrdp:2005_020
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  9. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2006. "Methods for Robust Control," CEPR Discussion Papers 5638, C.E.P.R. Discussion Papers.
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  13. Giordani, Paolo & Söderlind, Paul, 2002. "Solution of Macromodels with Hansen-Sargent Robust Policies: Some Extensions," SSE/EFI Working Paper Series in Economics and Finance 499, Stockholm School of Economics, revised 15 May 2003.
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