Model Uncertainty and the Design of Robust Monetary Policy Rules in a Small Open Economy
Title | Model Uncertainty and the Design of Robust Monetary Policy Rules in a Small Open Economy PDF eBook |
Author | Daniel O. Beltran |
Publisher | |
Pages | 214 |
Release | 2007 |
Genre | |
ISBN |
Robust Monetary Policy in a Small Open Economy
Title | Robust Monetary Policy in a Small Open Economy PDF eBook |
Author | Kai Leitemo |
Publisher | |
Pages | 0 |
Release | 2007 |
Genre | |
ISBN |
This paper studies how a central bank's preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyze the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.
Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy
Title | Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy PDF eBook |
Author | Alexei Onatski |
Publisher | |
Pages | 33 |
Release | 2000 |
Genre | Macroeconomics |
ISBN |
This paper examines monetary policy in Rudebusch and Svensson's (1999) two equation macroeconomic model when the policymaker recognizes that the model is an approximation and is uncertain about the quality of that approximation. It is argued that the minimax approach of robust control provides a general and tractable alternative to the conventional Bayesian decision theoretic approach. Robust control techniques are used to construct robust monetary policies. In most (but not all) cases, these robust policies are more aggressive than the optimal policies absent model uncertainty. The specific robust policies depend strongly on the formation of model uncertainty used, and we make some suggestions about which formulation is most relevant for monetary policy applications.
Real-time Model Uncertainty in the United States
Title | Real-time Model Uncertainty in the United States PDF eBook |
Author | Robert J. Tetlow |
Publisher | |
Pages | 47 |
Release | 2010 |
Genre | |
ISBN |
Designing a Simple Loss Function for Central Banks
Title | Designing a Simple Loss Function for Central Banks PDF eBook |
Author | Davide Debortoli |
Publisher | International Monetary Fund |
Pages | 56 |
Release | 2017-07-21 |
Genre | Business & Economics |
ISBN | 1484311752 |
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
Robust Monetary Policy in a Small Open Economy
Title | Robust Monetary Policy in a Small Open Economy PDF eBook |
Author | Kai Leitemo |
Publisher | |
Pages | 0 |
Release | 2007 |
Genre | |
ISBN |
This paper studies how a central bank's preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyze the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.
Monetary Policy in a Small Open Economy with a Preference for Robustness
Title | Monetary Policy in a Small Open Economy with a Preference for Robustness PDF eBook |
Author | Richard Dennis |
Publisher | |
Pages | 33 |
Release | 2007 |
Genre | Monetary policy |
ISBN |