Robust Targeting Rules for Monetary Policy
Central Bank of Turkey Working Paper No. 60
30 Pages Posted: 27 May 2003
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory
By Richard Clarida, Jordi Galí, ...
-
The Science of Monetary Policy: A New Keynesian Perspective
By Richard Clarida, Jordi Galí, ...
-
The Science of Monetary Policy: a New Keynesian Perspective
By Richard Clarida, Jordi Galí, ...
-
An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version
-
Monetary Policy Rules in Practice: Some International Evidence
By Richard Clarida, Jordi Galí, ...
-
Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets