Robust Policies in a Sticky Information Economy
Posted: 21 Feb 2009 Last revised: 14 Feb 2012
Date Written: June 12, 2008
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: Suggested Citation