Robust Policies in a Sticky Information Economy

Posted: 21 Feb 2009 Last revised: 14 Feb 2012

See all articles by Francesco Giuli

Francesco Giuli

University of Rome III - Department of Economics

Date Written: June 12, 2008

Abstract

This paper analyzes the behavior of a central bank under strong ("Knightian") uncertainty when the short run trade-off between output and inflation is represented by the Sticky Information Phillips Curve proposed by Mankiw and Reis (2002). By solving the robust control problem analytically we show why model uncertainty does not affect the optimal monetary policy response to demand and productivity shocks, while it causes a stronger reaction of the monetary policy instrument to a cost push (i.e., mark up) shock. Differently from what occurs in sticky price models, the anti-attenuation effect can result in a degree of price level stabilization which is greater or lower than that experienced in the rational expectation model, depending on the central bank degree of conservatism. These results drammatically affect the rationale for delegating monetary policy to a central banker more conservative than society.

Keywords: Robust control, sticky information, minmax policies, delegation

JEL Classification: D81, E52, E58

Suggested Citation

Giuli, Francesco, Robust Policies in a Sticky Information Economy (June 12, 2008). Macroeconomic Dynamics, Vol 14, pp 311-342, 2010, Available at SSRN: https://ssrn.com/abstract=1296456

Francesco Giuli (Contact Author)

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

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