Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25456
Authors: 
Rustem, Berc
Wieland, Volker
Zakovic, Stan
Year of Publication: 
2005
Series/Report no.: 
CFS Working Paper 2005/14
Abstract: 
In this paper we compare expected loss minimization to worst-case or minimax analysis in the design of simple Taylor-style rules for monetary policy using a small model estimated for the euro area by Orphanides and Wieland (2000). We find that rules optimized under a minimax objective in the presence of general parameter and shock uncertainty do not imply extreme policy activism. Such rules tend to obey the Brainard principle of cautionary policymaking in much the same way as rules derived by expected loss minimization. Rules derived by means of minimax analysis are effective insurance policies imiting maximum loss over ranges of parameter values to be set by the policy maker. In practice, we propose to set these ranges with an eye towards the cost of such insurance cover in terms of the implied increase in expected inflation variability.
Subjects: 
Worst-case analysis
robust control
minimax
monetary policy rules
euro area
JEL: 
E52
E58
E61
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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