Citation

Discussion Paper Details

Please find the details for DP8826 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model

Author(s): Klaus Adam and Michael Woodford

Publication Date: February 2012

Keyword(s): belief distortions, near-rational expectations, robust control and target criterion

Programme Area(s): International Macroeconomics

Abstract: We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have 'rational expectations'.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8826

Bibliographic Reference

Adam, K and Woodford, M. 2012. 'Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8826