Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144457
Authors: 
Ilbas, Pelin
Røisland, Øistein
Sveen, Tommy
Year of Publication: 
2013
Series/Report no.: 
Working Paper Research 245
Abstract: 
There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.
Subjects: 
Model uncertainty
Optimal control
Simple rules
JEL: 
E52
E58
Document Type: 
Working Paper

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