Optimal robust monetary policy in a small open economy

Arbeitspapier

We study an optimal robust monetary policy for a small open economy. The robust control approach assumes that economic agents cannot assign probabilities to a set of plausible models and rather focuses on the worst possible misspecification from a benchmark model. Our findings suggest that, first, conducting a global robust optimal monetary policy is limited as deviations from the benchmark model lead to multiple equilibria. Second, when the central bank considers uncertainty only in the IS Curve or in the UIP, the space of unique solutions is expanded. In fact, the central bank reacts more aggressively to demand and real exchange rate shocks when it is robust to misspecifications in the IS curve only. Finally, our results suggest that the global robust optimal monetary policy is limited due to inflation persistency and the low exchange rate pass-through. The importance of anchoring inflation expectations is highlighted.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Papers ; No. 2022-17

Classification and Topics

• Classification: Wirtschaft ; Existence and Stability Conditions of Equilibrium ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Expectations; Speculations ; Monetary Policy ; Central Banks and Their Policies
• Subject: Robust control ; model uncertainty ; optimal monetary policy ; small open economy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): André, Marine Charlotte ; Medina Espidio, Sebastián
• Event: Veröffentlichung
• (who): Banco de México
• (where): Ciudad de México
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/273673
• Last update: 10.03.2025, 11:43 AM CET