Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211998 
Year of Publication: 
2004
Series/Report no.: 
Bank of Finland Discussion Papers No. 31/2004
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques.Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions.In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged.As a consequence, inflation is less volatile and output is more volatile than under a non-robust policy.Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).
Subjects: 
Knightian uncertainty
model uncertainty
robust control
min-max policies
JEL: 
E52
E58
F41
Persistent Identifier of the first edition: 
ISBN: 
952-462-186-X
Document Type: 
Working Paper

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