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Robust monetary policy in the New-Keynesian framework

Author

Listed:
  • Kai Leitemo

    (Bank of Finland)

  • Ulf Söderström

    (Bank of Finland)

Abstract

We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under a non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

Suggested Citation

  • Kai Leitemo & Ulf Söderström, 2005. "Robust monetary policy in the New-Keynesian framework," Macroeconomics 0508032, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0508032
    Note: Type of Document - pdf; pages: 26. Bank of Finland Discussion Papers 31/2004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Knightian uncertainty; model uncertainty; robust control; min- max policies;
    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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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