Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129520
Authors: 
Adam, Klaus
Woodford, Michael
Year of Publication: 
2012
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 12-1
Abstract: 
We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have "rational expectations".
Subjects: 
robust control
near-rational expectations
belief distortions
target criterion
JEL: 
D81
D84
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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