Robustly optimal monetary policy in a microfounded new Keynesian model

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URL:	https://ub-madoc.bib.uni-mannheim.de/29863
URN:	urn:nbn:de:bsz:180-madoc-298635
Document Type:	Working paper
Year of publication:	2012
The title of a journal, publication series:	Working Paper Series
Volume:	12-01
Place of publication:	Mannheim
Publication language:	English
Institution:	School of Law and Economics > Geldpolitik und Makroökonomik (Adam 2008-)
MADOC publication series:	Department of Economics > Working Paper Series
Subject:	330 Economics
Classification:	JEL: D81 , D84 , E52,
Keywords (English):	robust control , near-rational expectations , belief distortions , target criterion
Abstract:	We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have “rational expectations.”