Working Paper: NBER ID: w11942
Authors: Marc P. Giannoni
Abstract: This paper characterizes a robust optimal policy rule in a simple forward-looking model, when the policymaker faces uncertainty about model parameters and shock processes. We show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty. Thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations. However uncertainty may amplify the degree of "super-inertia" required by optimal monetary policy. We finally discuss the sensitivity of the results to alternative assumptions.
Keywords: Robust Optimal Policy; Monetary Policy; Parameter Uncertainty; Shock Uncertainty
JEL Codes: C61; D81; E42; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty (D89) | Interest rate response (E43) |
| Uncertainty (D89) | Need for aggressive policy response (E63) |
| Robust optimal policy rules (E61) | Performance under worst-case parameter configuration (H21) |
| Uncertainty (D89) | Degree of superinertia required (C69) |