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Robust optimal policies in behavioral New Keynesian macro models

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  • Di Bartolomeo Giovanni
  • Serpieri Carolina

Abstract

This paper introduces 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 expectations formation used by a fraction of (boundedly rational) agents to generate their beliefs, while the rest of the population forms its expectations in a rational way. The central bank ignores the fraction of boundedly rational agents and/or 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

  • Di Bartolomeo Giovanni & Serpieri Carolina, 2019. "Robust optimal policies in behavioral New Keynesian macro models," wp.comunite 00143, Department of Communication, University of Teramo.
    • Handle: RePEc:ter:wpaper:00143
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