IDEAS home Printed from https://ideas.repec.org/p/sce/scecf1/18.html
   My bibliography  Save this paper

Avoiding Nash Inflation: does robust policy help?

Author

Listed:
  • Robert J. Tetlow and Peter von zur Muehlen

Abstract

In his monograph The Conquest of American Inflation, Sargent (1999) points out the perils of econometric policy evaluation of the Theil-Tinbergen tradition wherein one estimates a reduced form econometric model of the economy and subjects it to control. If the model is misspecified, as is usually the case, the resulting economic performance can be poor. A substantial literature adopting the Bayesian approach to parameter uncertainty has devel- oped which treats estimated model parameters as being correct up to a well-defined ran- dom error. Policy is then designed to take account of that error. In most instances, the policy prescription that arises from such an exercise is one of attenuation; that is, policy is less aggressive than the certainty equivalent case, or in the words of Blinder (1998) needs to "get it right, then do less." As is well known from Lucas (1976) however, the `random error' may not be random at all but rather could be a function of the conduct of monetary policy. In contrast to the Bayesian approach, the Knightian response to uncertainty leads, in most cases, to policy that is more aggressive than the certainty equivalent case. This paper examines a variant of Sargent's problem where a monetary authority is recursively estimating and controlling a misspecified model, getting wrong the persistence of infla- tion. We compare the Bayesian and Knightian (robust) approaches to model uncertainty. We show that in at least some circumstances, the authority is better off utilizing the robust approach and ignoring Blinder's advice. The robust policymaker protects against statisti- cally unlikely inflation instability--indirectly acknowledging the Lucas critique--and par- tially avoids the pitfalls Lucas warned of.

Suggested Citation

  • Robert J. Tetlow and Peter von zur Muehlen, 2001. "Avoiding Nash Inflation: does robust policy help?," Computing in Economics and Finance 2001 18, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:18
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below 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.

    More about this item

    Keywords

    monetary policy; uncertainty; robust control;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf1:18. 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). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.