Dealing with Uncertainty: Robust Rules in Monetary Policy

Posted: 3 Oct 2006

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Abstract

We argue that in seeking to insure against model uncertainty, monetary policy makers are often ready to trade ex-post performance for greater certainty in the outcome. They thus look for rules that although not optimal ex post, have certain properties that qualify them as robust. We apply first, Gul's (1991) approach to capture "disappointment" aversion and then define the properties the notion of robustness entails. With these two tools we then link the desirability of such robust rules to the degree of policy makers' uncertainty aversion. We thus show that provided such robust rules exist, a larger degree of disappointment aversion leads to a greater emphasis on robustness in policy implementation.

Keywords: Monetary Policy, Uncertainty, Robust Rules, Disappointment Aversion

JEL Classification: E52, E58, C70

Suggested Citation

Demertzis, Maria and Tieman, Alexander F., Dealing with Uncertainty: Robust Rules in Monetary Policy. Scottish Journal of Political Economy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=934502

Maria Demertzis (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Alexander F. Tieman

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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