Robust Targeting Rules for Monetary Policy

Central Bank of Turkey Working Paper No. 60

30 Pages Posted: 27 May 2003

See all articles by Hakan Kara

Hakan Kara

Central Bank of Turkey; Bilkent University

Date Written: November 2002

Abstract

This paper explores robust optimal targeting rules in a standard forward looking model when i) policy maker has doubts about the parameters while private agents know the model and ii) policy maker and the private sector share the same doubts. It is shown that, while the robust optimal policy rule are the same in both cases, private sector's behavior, and hence the resulting equilibrium is different. Two distinct sources of parameter uncertainty are considered: When the agents' doubts take the form of uncertainty about the slope of the Phillips curve, robust policy rule prescribes a less aggressive response to deviations of inflation from the target - somewhat contrary to the recent findings in the literature. On the other hand, if the source of uncertainty is imperfect knowledge of persistence of shocks, robust monetary policy calls for a more aggressive response to inflation.

Keywords: Optimal Monetary Policy, Targeting Rules, Knightian Uncertainty, Robust Control

JEL Classification: E52, E58, D89

Suggested Citation

Kara, A. Hakan, Robust Targeting Rules for Monetary Policy (November 2002). Central Bank of Turkey Working Paper No. 60, Available at SSRN: https://ssrn.com/abstract=402620 or http://dx.doi.org/10.2139/ssrn.402620

A. Hakan Kara (Contact Author)

Central Bank of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara
Turkey

Bilkent University ( email )

Bilkent, Ankara 06533
Turkey
06800 (Fax)

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