Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211951 
Authors: 
Year of Publication: 
2003
Series/Report no.: 
Bank of Finland Discussion Papers No. 18/2003
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank's model of the economy is subject to misspecifications.It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger.Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank's model increases.This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be.
Subjects: 
risk-sensitivity
robust control theory
monetary policy
Brainard conservatism
model uncertainty
JEL: 
E58
Persistent Identifier of the first edition: 
ISBN: 
952-462-072-3
Document Type: 
Working Paper

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