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Robustly optimal monetary policy in a behavioral environment

Author

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  • Lahcen Bounader

    (International Monetary Fund)

  • Guido Traficante

    (European University of Rome)

Abstract

This paper studies robustly optimal monetary policy in a behavioral New Keynesian model, where the private sector has myopia, while the central bank has Knightian uncertainty about the degree of myopia of the private sector and the degree of price stickiness. In such a setup the central bank solves an optimal robust monetary policy problem. We show that under uncertainty in myopia the Brainard’s attenuation principle holds, while under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive.

Suggested Citation

  • Lahcen Bounader & Guido Traficante, 2022. "Robustly optimal monetary policy in a behavioral environment," Working Papers 2022.01, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2022.01
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal monetary policy; bounded rationality; min- max; parameter uncertainty;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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