Robust monetary policy in a small open economy
Leitemo, Kai; Söderström, Ulf (05.07.2005)
Numero
20/2005Julkaisija
Suomen Pankki
2005
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807575Tiivistelmä
This paper studies how a central bank's preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy.Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyse the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate.We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification. Keyword(s): Knightian uncertainty, min-max policies, model uncertainty and robust control JEL(s): E52 , E58 , F41
Julkaisuhuomautus
Ilmestynyt myös CEPR ; Discussion paper ; 5071 sekä Journal of Economic Dynamics and Control 32 ; 10 ; 2008.