Dealing with Uncertainty: Robust Rules in Monetary Policy

13 Pages Posted: 2 May 2007

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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 approach of 'disappointment' aversion to describe policy makers' aversion to uncertainty 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' aversion to uncertainty. 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.

Suggested Citation

Demertzis, Maria and Tieman, Alexander F., Dealing with Uncertainty: Robust Rules in Monetary Policy. Scottish Journal of Political Economy, Vol. 54, No. 2, pp. 295-307, May 2007. Available at SSRN: https://ssrn.com/abstract=980145 or http://dx.doi.org/10.1111/j.1467-9485.2007.00416.x

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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