Stochastic Optimization and Worst-Case Analysis in Monetary Policy Design

  title={Stochastic Optimization and Worst-Case Analysis in Monetary Policy Design},
  author={Stan Žakovi{\'c} and Volker Wieland and B. Rustem},
  journal={Computational Economics},
  • Stan Žaković, Volker Wieland, B. Rustem
  • Published 2007
  • Economics
  • In this paper we compare expected loss minimization to worst-case or minimax analysis in the design of simple Taylor-style rules for monetary policy. To this end we use a small model estimated for the euro area by Orphanides and Wieland (2000). We find that rules optimized under a minimax objective in the presence of general parameter and shock uncertainty do not imply extreme policy activism. Such rules also tend to obey the Brainard principle, which implies that policy responsiveness declines… CONTINUE READING

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