In:
Macroeconomic Dynamics, Cambridge University Press (CUP), Vol. 20, No. 6 ( 2016-09), p. 1504-1526
Abstract:
We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. We find that, first, whether robust optimal monetary policy under commitment responds more cautiously or more aggressively depends crucially on the source of shock. Imperfect pass-through amplifies the robust policy. Second, if the central bank is concerned about uncertainty, it dampens volatility in the inflation rate preemptively but accepts higher volatility in the output gap and loan rate. However, for highly sticky loan rates, insurance against model misspecification becomes particularly pricy. Third, if the central bank fears uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilization away from inflation.
Type of Medium:
Online Resource
ISSN:
1365-1005
,
1469-8056
DOI:
10.1017/S136510051400100X
Language:
English
Publisher:
Cambridge University Press (CUP)
Publication Date:
2016
detail.hit.zdb_id:
1501533-6
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