Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273673 
Year of Publication: 
2022
Series/Report no.: 
Working Papers No. 2022-17
Publisher: 
Banco de México, Ciudad de México
Abstract: 
We study an optimal robust monetary policy for a small open economy. The robust control approach assumes that economic agents cannot assign probabilities to a set of plausible models and rather focuses on the worst possible misspecification from a benchmark model. Our findings suggest that, first, conducting a global robust optimal monetary policy is limited as deviations from the benchmark model lead to multiple equilibria. Second, when the central bank considers uncertainty only in the IS Curve or in the UIP, the space of unique solutions is expanded. In fact, the central bank reacts more aggressively to demand and real exchange rate shocks when it is robust to misspecifications in the IS curve only. Finally, our results suggest that the global robust optimal monetary policy is limited due to inflation persistency and the low exchange rate pass-through. The importance of anchoring inflation expectations is highlighted.
Subjects: 
Robust control
model uncertainty
optimal monetary policy
small open economy
JEL: 
C62
D83
D84
E52
E58
Document Type: 
Working Paper
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