How Robustness can Lower the Cost of Discretion

  title={How Robustness can Lower the Cost of Discretion},
  author={Richard Dennis},
Model uncertainty has the potential to change importantly how monetary policy is conducted, making it an issue that central banks cannot ignore. Using a standard new Keynesian business cycle model, this paper analyzes the behavior of a central bank that conducts policy under discretion while fearing that its model is misspeci…ed. The main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is… CONTINUE READING


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