Robustly optimal monetary policy in a behavioral environment

This paper studies 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. In such a setup the central bank solves an optimal robust monetary policy problem. We show that under uncertainty in myopia the Brainard’s attenuation principle holds, while under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive.

Author: Lahcen; Guido, Bounader; Traficante
Volume: 2022.01
Publisher: INFER
Year: 2022
No. of pages: 32
Working papers