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Title: Methods for Robust Control

Author(s): Richard Dennis, Kai Leitemo and Ulf S�derstr�m

Publication Date: April 2006

Keyword(s): misspecification, optimal policy and robust control

Programme Area(s): International Macroeconomics

Abstract: Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent, 2006, and Giordani and S�derlind, 2004). In this paper we show that the structural-form methods developed by Dennis (2006) to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in state-space form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibria for robust control problems. We apply both state-space and structural solution methods to an empirical New Keynesian business cycle model and find that the differences between the methods are both qualitatively and quantitatively important. In particular, with the structural-form solution methods the specification errors generally involve changes to the conditional variances in addition to the conditional means of the shock processes.

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Bibliographic Reference

Dennis, R, Leitemo, K and S�derstr�m, U. 2006. 'Methods for Robust Control'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5638