Robustifying optimal monetary policy using simple rules as cross-checks

Arbeitspapier

There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: NBB Working Paper ; No. 245

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies
• Subject: Model uncertainty ; Optimal control ; Simple rules ; Geldpolitik ; Regelbindung versus Diskretion ; Modellierung

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ilbas, Pelin ; Røisland, Øistein ; Sveen, Tommy
• Event: Veröffentlichung
• (who): National Bank of Belgium
• (where): Brussels
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/144457
• Last update: 10.03.2025, 11:46 AM CET