Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/308813 
Year of Publication: 
2025
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 2/2025
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We offer a contribution to the analysis of optimal monetary policy. The standard approach to determine what policy rule a central bank should follow is to take a single structural model and minimize the unconditional volatilities of inflation and real activity. In this paper, we propose monetary policy rules that perform robustly across a broad range of structural models, focusing on minimizing volatility at the frequencies most relevant for policymakers' stabilization goals. Our findings indicate that robust rules, which account for model uncertainty, advocate significantly less aggressive policy responses. Moreover, incorporating frequency-specific stabilization preferences further moderates the optimal policy actions. Ignoring model uncertainty imposes significant costs, while the cost of insuring against this uncertainty is relatively low. This cost-benefit analysis strongly supports adopting a robust-model approach to monetary policy.
Subjects: 
monetary policy rules
policy evaluation
model comparison
model uncertainty
frequency domain
design limits
DSGE models
JEL: 
C49
E32
E37
E52
E58
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.