Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318144 
Year of Publication: 
2017
Series/Report no.: 
BCAM Working Paper No. 1701
Publisher: 
Birkbeck, University of London, Birkbeck Centre for Applied Macroeconomics (BCAM), London
Abstract: 
In this paper I study how financial frictions affect robustness of monetary policy in DSGE models in the case of model uncertainty. The types of frictions I consider are financial accelerator and collateral constraints. Modeling monetary policy in terms of optimal interest rate rules, I find that welfare-maximizing policies for the models with financial frictions are robust to model uncertainty. Policy rule optimal for the basic New Keynesian model is not robust. Thereby I show that when there is uncertainty about what type of frictions is at work, a policymaker exposes economy to risks of significant welfare losses by using a reference model without frictions as economy representation. Using fault tolerance approach I find that modified policy rule optimal for the basic New Keynesian model is robust when it allows to respond to fluctuations in output.
Subjects: 
optimal monetary policy rules
financial frictions
DSGE models
robustness
JEL: 
E32
E37
E44
E52
Document Type: 
Working Paper

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