Title: Robust monetary policy in a model with financial distress
Authors: Gerke, Rafael ×
Hammermann, Felix
Lewis, Vivien #
Issue Date: Jun-2012
Publisher: Elsevier Science Ltd.
Series Title: Journal of Macroeconomics vol:34 issue:2 pages:318-325
Abstract: We characterise optimal discretionary monetary policy responses to cost-push shocks and to financial distress in the presence of model uncertainty. Under robust control, the central bank reacts more aggressively to both types of shocks, and less to the lagged policy rate, than if the true model is known. We document how the objective to stabilise the policy instrument conflicts with the concern for robustness to model misspecification: the higher the weight on interest rate stabilisation in the loss function, the more the robust policy deviates from the optimal policy under rational expectations. Financial distress is akin to a contractionary demand shock and does not induce a policy trade-off; thus model uncertainty does not constrain monetary policy in the face of financial shocks.
ISSN: 0164-0704
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Non-KU Leuven Association publications
× corresponding author
# (joint) last author

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