Robust expectations and uncertain models : a robust contol approach with application to the new Keynesian economy

Show full item record

Title: Robust expectations and uncertain models : a robust contol approach with application to the new Keynesian economy
Author: Kilponen, Juha
Organization: Suomen Pankki
Series: Suomen Pankin keskustelualoitteita
Series number: 5/2004
Year of publication: 2004
Publication date: 10.2.2004
Pages: 43 s.
Keywords: mallit; epävarmuus; odotukset; rahapolitiikka; informaatio; epätäydellinen informaatio
JEL: D81; C61; E52
Abstract: This paper extends Svensson and Woodford's (2003) partial information framework by allowing the private agents to achieve robustness against incomplete information about the structure of the economy by distorting their expectations in a particular direction.It shows how a linear rational expectations equilibrium under concern for robustness can be solved by exploiting the recursive structure of the problem and appropriately modifying the Bellman equations in their framework.The standard Kalman filter is then used for information updating under imperfect measurement of the state variables.The standard New Keynesian model is used for illustrating how concern for modelling errors interacts with imperfect information.Agents achieve robustness by simultaneously over-estimating the persistence of exogenous shocks, but under-estimating the policy response to the output gap.This under-estimation, combined with imperfect measurement, leads to larger and more persistent responses of private consumption to government expenditure shocks under robust expectations. Key words: expectations, robust control, model uncertainty, monetary policy, imperfect information JEL classification numbers: D81, C61, E52
Rights: https://helda.helsinki.fi/bof/copyright


Files in this item

Total number of downloads: Loading...

Files Size Format View
111497.pdf 574.9Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record