Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty / Marc Giannoni.

Format:

Book

Author/Creator:

Giannoni, Marc.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11942.

NBER working paper series no. w11942

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

This paper characterizes a robust optimal policy rule in a simple forward-looking model, when the policymaker faces uncertainty about model parameters and shock processes. We show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty. Thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations. However uncertainty may amplify the degree of "super-inertia" required by optimal monetary policy. We finally discuss the sensitivity of the results to alternative assumptions.

Notes:

Print version record

January 2006.