Working Paper: NBER ID: w7490
Authors: Alexei Onatski; James H. Stock
Abstract: This paper examines monetary policy in Rudebusch and Svensson's (1999) two equation macroeconomic model when the policymaker recognizes that the model is an approximation and is uncertain about the quality of that approximation. It is argued that the minimax approach of robust control provides a general and tractable alternative to the conventional Bayesian decision theoretic approach. Robust control techniques are used to construct robust monetary policies. In most (but not all) cases, these robust policies are more aggressive than the optimal policies absent model uncertainty. The specific robust policies depend strongly on the formation of model uncertainty used, and we make some suggestions about which formulation is most relevant for monetary policy applications.
Keywords: No keywords provided
JEL Codes: E58; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Model Uncertainty (D81) | Monetary Policy Aggressiveness (E63) |
| Type of Model Uncertainty (C52) | Monetary Policy Aggressiveness (E63) |