Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212018 
Year of Publication: 
2005
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 20/2005
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper studies how a central bank's preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy.Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyse the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate.We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.
Subjects: 
Knightian uncertainty
min-max policies
model uncertainty and robust control
JEL: 
E52
E58
F41
Persistent Identifier of the first edition: 
ISBN: 
952-462-233-5
Document Type: 
Working Paper

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