Hostname: page-component-7b7567c8c-wxvwp Total loading time: 0 Render date: 2026-11-14T09:32:14.905Z Has data issue: false hasContentIssue false
  • English
  • Français

WOODFORD'S APPROACH TO ROBUST POLICY ANALYSIS IN A LINEAR-QUADRATIC FRAMEWORK

Published online by Cambridge University Press:  30 May 2018

Hyosung Kwon and
Jianjun Miao
Hyosung Kwon
Affiliation:
The Bank of Korea
Jianjun Miao*
Affiliation:
Boston UniversityZhejiang UniversitySouthwestern University of Finance and Economics
*
Address correspondence to: Jianjun Miao, Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, USA; e-mail: miaoj@bu.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper extends Woodford's approach to the robustly optimal monetary policy to a general linear quadratic framework. We provide algorithms to solve for a time-invariant linear robustly optimal policy in a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretion. We apply our methods to a New Keynesian model of monetary policy with persistent cost-push shocks and inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation when inflation is more persistent.

Keywords

CommitmentDiscretionRobustnessPolicy Analysis

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 5 , July 2019, pp. 1895 - 1920
Copyright
Copyright © Cambridge University Press 2018 

Footnotes

We would like to thank Mike Woodford and Simon Gilchrist for helpful comments. We have benefitted from comments by the seminar participants at Boston University. First version: February 2012.

References

REFERENCES

Adam, Klaus and Woodford, Michael (2012) Robustly optimal monetary policy in a microfounded new Keynesian model. Journal of Monetary Economics 59, 468–487.Google Scholar
Anderson, Evan W., Hansen, Lars Peter, and Sargent, Thomas J. (2003) A quartet of semigroups for model specification, robustness, prices of risk, and model detection. Journal of the European Economic Association 1, 68–123.Google Scholar
Backus, David and Driffil, John (1986) The Consistency of Optimal Policy in Stochastic Rational Expectations Models. CEPR discussion paper 124.Google Scholar
Dennis, Richard (2008) Robust control with commitment: A modification to Hansen-Sargent. Journal of Economic Dynamics and Control 32, 2061–2084.Google Scholar
Dennis, Richard, Leitemo, Kai, and Söderström, Ulf (2009) Methods for robust control. Journal of Economic Dynamics and Control 33, 1604–1616.Google Scholar
Ellsberg, Daniel (1961) Risk, ambiguity and the savage axiom. Quarterly Journal of Economics 75, 643–669.Google Scholar
Epstein, Larry G. and Wang, Tan (1994) Intertemporal asset pricing under Knightian uncertainty. Econometrica 62, 283–322.Google Scholar
Fuhrer, Jeff and Moore, George (1995) Inflation persistence. The Quarterly Journal of Economics 110, 127–159.Google Scholar
Galí, Jordi and Gertler, Mark (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.Google Scholar
Gilboa, Itzach and Schmeidler, David (1989) Maxmin expected utility with non-unique priors. Journal of Mathematical Economics 18, 141–153.Google Scholar
Giordani, Paolo and Söderlind, Paul (2004) Solution of macromodels with Hansen-Sargent robust policies: Some extensions. Journal of Economic Dynamics and Control 28, 2367–2397.Google Scholar
Golub, Gene H. and van Loan, Charles F. (1996) Matrix Computations. Baltimore and London: The Johns Hopkins University Press.Google Scholar
Hansen, Lars Peter (2007) Beliefs, doubts and learning: The valuation of macroeconomic risk. American Economic Review 97, 1–30.Google Scholar
Hansen, Lars Peter and Sargent, Thomas J. (2001) Robust control and model uncertainty. American Economic Review 91, 60–66.Google Scholar
Hansen, Lars Peter and Sargent, Thomas J. (2008) Robustness. Princeton, New Jersey: Princeton University Press.Google Scholar
Hansen, Lars Peter and Sargent, Thomas J. (2012) Three types of ambiguity. Journal of Monetary Economics 59, 422–445.Google Scholar
Ju, Nengjiu and Miao, Jianjun (2012) Ambiguity, learning, and asset returns. Econometrica 80, 559–591.Google Scholar
Klein, Paul (2000) Using the generalized Schur form to solve a multivariate linear rational expectations model. Journal of Economic Dynamics and Control 24, 1405–1423.Google Scholar
Kwon, Hyosung and Miao, Jianjun (2017) Three types of robust Ramsey problem in a linear-quadratic framework. Journal of Economic Dynamics and Control 76, 211–231.Google Scholar
Leitemo, Kai and Söderström, Ulf (2008) Robust monetary policy in the new Keynesian framework. Macroeconomic Dynamics 12 (Suppl. S1), 126–135.Google Scholar
Sims, Christopher A. (2002) Solving linear rational expectations models. Computational Economics 20, 1–20.Google Scholar
Söderlind, Paul (1999) Solution and estimation of RE macromodels with optimal policy. European Economic Review 43, 813–823.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Woodford, Michael (2010) Robustly optimal monetary policy with near-rational expectations. American Economic Review 100, 274–303.Google Scholar