Monetary Policy Attenuation As Robust Response To Misspecified Dynamics In A Forward Looking Model
This paper explores Knightian model uncertainty about dynamic misspecification as a possible explanation of the considerable difference between estimated interest rate rules and optimal feedback descriptions of monetary policy. In the literature on robust control, Knightian uncertainty about a model's structure has been shown to induce the decision maker to become a robust Stackelberg leader playing against evil nature, that is, against an agent choosing uncertainty to maximize the leader's welfare losses. For an estimated forward looking model of the US economy, we find that rules designed to protect against the worst-case consequences of misspecified dynamics are less aggressive than either certainty-equivalent rules or robust rules. Rules that are robust against unmodeled dynamics also turn out to be good approximations of a rule estimated over recent history. The drawback of such attenuated policies is that when the system turns out to have been correctly specified, they may render the economy vulnerable to shocks at critical business cycle frequencies.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||05 Jul 2000|
|Date of revision:|
|Contact details of provider:|| Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain|
Fax: +34 93 542 17 46
Web page: http://enginy.upf.es/SCE/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:sce:scecf0:302. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.