Robustly optimal monetary policy in a behavioral environment

This brief discusses a robustly optimal monetary policy in a behavioral New Keynesian model, where the private sector has myopia, while the central bank has Knightian uncertainty about the degree of myopia of the private sector and the degree of price stickiness. As shown in Bounader and Traficante (2022), in such a setup the central bank solves an optimal robust monetary policy problem. Under uncertainty about myopia the Brainard’s attenuation principle holds, while under uncertainty on price stickiness, alone or in addition to myopia, the attenuation principle is violated and monetary policy becomes more aggressive.