Robust monetary policy in the New-Keynesian framework

Arbeitspapier

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).

Object Details

• ISBN: 952-462-186-X
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Discussion Papers ; No. 31/2004

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Open Economy Macroeconomics
• Subject: Knightian uncertainty ; model uncertainty ; robust control ; min-max policies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leitemo, Kai ; Söderström, Ulf
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/211998
• Last update: 10.03.2025, 11:41 AM CET