Dealing with Uncertainty: Robust Rules in Monetary Policy
Posted: 3 Oct 2006
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: Suggested Citation