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Robust optimal monetary policies in behavioral New Keynesian DSGE models

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  • Giovanni Di Bartolomeo
  • Carolina Serpieri

Abstract

Uncertainty is a challenge for monetary policy. This paper introduces local model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities.

Suggested Citation

  • Giovanni Di Bartolomeo & Carolina Serpieri, 2025. "Robust optimal monetary policies in behavioral New Keynesian DSGE models," Working Papers in Public Economics 261, Department of Economics and Law, Sapienza University of Roma.
  • Handle: RePEc:sap:wpaper:wp261
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    More about this item

    Keywords

    Brainard Principle; Monetary Policy; Bounded Rationality; Expectation Formation; Non-Bayesian Robust Control;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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