Robust Control and Monetary Policy Delegation

Sidiropoulos, Moïse and Diana, Giuseppe (2006): Robust Control and Monetary Policy Delegation. Published in: Massimo Salzano and David Colander (ed.): “Complexity Hints for Economic Policy”, Springer-Verlag Publisher, 2007 (2007): pp. 303-310.

Abstract

This paper adapts in a simple static context the Rogoff's (1985) analysis of monetary policy delegation to a conservative central banker to the robust control framework. In this framework, uncertainty means that policymakers are unsure about their model, in the sense that there is a group of approximate models that they also consider as possibly true, and their objective is to choose a rule that will work under a range of di¤erent model specifications. We find that robustness reveals the emergence of a precautionary behaviour in the case of unstructured model uncertainty, reducing thus government's willingness to delegate monetary policy to a conservative central banker.

• Item Type: MPRA Paper
• Language: English
• Keywords: Robust control; Monetary policy delegation; Central bank conservativeness.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

[1] Barro, R. and Gordon, D. (1983) A Positive Theory of Monetary Policy in a Natural Rate Model. Journal of Political Economy, 91, 589-610.

[2] Hansen, L. P. and Sargent, T. J. (2004), Misspecification in Recursive Macroeconomic Theory. Book manuscript, University of Chicago and NewYork University.

[3] Kydland, F. and Prescott E. (1977) Rules Rather than Discretion: the Inconsistency of Optimal Plans. Journal of Political Economy, 85, 473-491.

[4] Leitemo, K and Söderström, U (2004) Robust monetary policy in a small open economy. Manuscript, Norwegian School of Management and Università Bocconi.

[5] Rogoff, K., 1985, The Optimal Degree of Commitment to an Intermediate Monetary Target. Quarterly Journal of Eco-nomics, 100, 1169-1189.

[6] Giordani, P and Söderlind, P (2004) Solution of macromodels with Hansen-Sargent robust policies: Some extensions. Journal of Economic Dynamics and Control, 28 (12), 2367-2397.

[7] Onatski, A and Williams, N (2003) Modeling model uncertainty. Journal of the European Economic Association, 1 (5), 1087-1122.

[8] Walsh, C (2004) Robust optimal instrument rules and robust control: An equivalence result. Manuscript, University of California, Santa Cruz.