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A Positive theory of monetary policy and robust control

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  • Kilponen, Juha

Abstract

This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank's model of the economy is subject to misspecifications.It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger.Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank's model increases.This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be.

Suggested Citation

  • Kilponen, Juha, 2003. "A Positive theory of monetary policy and robust control," Bank of Finland Research Discussion Papers 18/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_018
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    Cited by:

    1. Kilponen, Juha & Leitemo, Kai, 2006. "Robustness in monetary policymaking: a case for the Friedman rule," Bank of Finland Research Discussion Papers 4/2006, Bank of Finland.
    2. Tillmann Peter, 2009. "Does Model Uncertainty Justify Conservatism? Robustness and the Delegation of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-28, June.
    3. Meixing Dai & Eleftherios Spyromitros, 2010. "Accountability And Transparency About Central Bank Preferences For Model Robustness," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(2), pages 212-237, May.
    4. Francesco Giuli, 2007. "Robust control in a Sticky information economy," Working Papers in Public Economics 98, Department of Economics and Law, Sapienza University of Roma.
    5. Kilponen, Juha & Leitemo, Kai, 2006. "Robustness in monetary policymaking : a case for the Friedman rule," Research Discussion Papers 4/2006, Bank of Finland.
    6. Kilponen, Juha, 2004. "Robust expectations and uncertain models: a robust contol approach with application to the new Keynesian economy," Bank of Finland Research Discussion Papers 5/2004, Bank of Finland.
    7. Juha Kilponen & Kai Leitemo, 2008. "Model Uncertainty and Delegation: A Case for Friedman's k‐Percent Money Growth Rule?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 547-556, March.

    More about this item

    Keywords

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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