Robustly optimal monetary policy in a microfounded new Keynesian model


Adam, Klaus ; Woodford, Michael


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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 > VWL, Internat. Wirtschaftsbeziehungen (Adam)
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.”

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Adam, Klaus ; Woodford, Michael (2012) Robustly optimal monetary policy in a microfounded new Keynesian model. Open Access Working Paper Series Mannheim 12-01 [Working paper]
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