A Positive Theory of Monetary Policy and Robust Control

Kilponen, Juha

doi:10.2139/ssrn.438122

Cited by 19 publications

(4 citation statements)

References 30 publications

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“…Giannoni (2002) states that, in a set‐up with model uncertainty, the interest rate responds more aggressively to shocks with respect to when there is no uncertainty. Similarly, Kilponen (2003) and Leitemo and Söderström (2005) find that inflation and its expected value are higher in the worst case compared with the case without uncertainty. The argument that model uncertainty justifies active responses to shocks can motivate the central bank's choice of opacity about revealing the information regarding its preference for robustness.…”

Section: Introductionmentioning

confidence: 90%

Robust Monetary Policy Under Uncertainty About Central Bank Preferences

Qin

Sidiropoulos

Spyromitros

2010

Bulletin of Econ Res

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In this paper, we study the impact of central bank opacity on macroeconomic performances in a new Keynesian framework with model uncertainty using robust control techniques. We identify a new source of central bank opacity, which refers to the lack of information about the central bank's preference for robustness in the sense of Hansen and Sargent. We find closed-form solutions for the robust control problem, analysing the impact of the lack of transparency about the central bank's preferences for robustness. We show that an increased transparency about the central bank's preference for robustness makes monetary policy respond less aggressively to cost-push shocks, thus reducing the inflation and output gap variability. As a consequence, inflation and output gap are less volatile than under central bank opacity about its preference for robustness.

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Section: Introductionmentioning

confidence: 90%

Robust Monetary Policy Under Uncertainty About Central Bank Preferences

Qin

Sidiropoulos

Spyromitros

2010

Bulletin of Econ Res

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“…A policymaker that is confident about the reference model will typically choose a high θ as he does not want to pay a high price in terms of social costs by deviating too much from the optimal policy in a model he believes in. The problem solves for the 3 For similar approaches in dealing with model uncertainty, see Hansen and Sargent (2003a,b), Giordani and Söderlind (2004), , Kilponen (2003Kilponen ( , 2004, , Söderström (2004, 2005), Walsh (2004Walsh ( , 2005b, Onatski and Williams (2003) and Tetlow and Muehlen (2001). 4 In setting up the state space form of the model we are assuming that policy is implemented using the short-term interest rate, i t .…”

Section: Robust Monetary Policymentioning

confidence: 99%

Robustness in Monetary Policymaking: A Case for the Friedman Rule

Kilponen

Leitemo

2007

SSRN Journal

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Inflation targeting involves using all available information in stabilizing inflation around some target rate (Svensson, 2003). Inflation is typically at the very end of the transmission mechanism and hence its determination is subject to much model uncertainty which the central bank will want to guard against using robust policies. Such robustness comes however with the cost of increased social loss under the most likely description of the economy. We show that with a sufficiently high degree of model uncertainty, adherence to the Friedman rule of increasing the money stock by k percent will be superior as the price paid for robustness is smaller.

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“…When monitoring is incomplete due to imperfect information or lack of transparency, it is optimal to place less weight on achieving the inflation target to avoid distorting stabilization policy. Kilponen (2003) has also considered a delegation framework including robustness issues in the Barro-Gordon framework. Considering that the central bank is perfectly transparent, he has found that the model uncertainty implies more aggressive policy responses.…”

Section: Introductionmentioning

confidence: 99%

Accountability and Transparency About Central Bank Preferences for Model Robustness

Dai

Spyromitros

2010

Scottish Journal of Political Economy

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Using a New Keynesian model subject to misspecifications, we examine the accountability issue in a framework of delegation where government and private agents are uncertain about the central bank's preference for model robustness. We show that, in the benchmark case of full transparency, the optimal inflation targeting weight (or penalty) is decreasing with the preference for robustness. Departing from the benchmark equilibrium, the central bank has then incentive to be less transparent in order to reduce the optimal inflation targeting weight and thus to become more independent vis‐à‐vis the government. We also find that greater opacity will increase the sensibility of inflation and model misspecification to the inflation shock but will decrease that of output‐gap. Since macroeconomic volatility could be increased or decreased under more opacity, there could exist in some cases a trade‐off between the level and the variability of inflation (and output gap). Persistent inflation shocks could be associated with a higher inflation targeting weight as well as a higher sensibility of inflation and output gap to the inflation shock but a lower sensibility of model misspecification.

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A Positive Theory of Monetary Policy and Robust Control

Cited by 19 publications

References 30 publications

Robust Monetary Policy Under Uncertainty About Central Bank Preferences

Robust Monetary Policy Under Uncertainty About Central Bank Preferences

Robustness in Monetary Policymaking: A Case for the Friedman Rule

Accountability and Transparency About Central Bank Preferences for Model Robustness

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