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ROBUST POLICIES IN A STICKY INFORMATION ECONOMY

Published online by Cambridge University Press:  04 May 2010

Francesco Giuli
Francesco Giuli*
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Francesco Giuli, Department of Public Economics, Sapienza University of Rome, Italy; e-mail: francesco.giuli@uniroma1.it.
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Abstract

This paper analyzes the behavior of a central bank under strong (“Knightian”) uncertainty when the short-run trade-off between output and inflation is represented by the sticky information Phillips curve proposed by Mankiw and Reis [Quarterly Journal of Economics 117(4), 1295–1328 (2002)]. By solving the robust control problem analytically, we show why model uncertainty does not affect the optimal monetary policy response to demand and productivity shocks, whereas it causes a stronger reaction of the monetary policy instrument to a cost-push (i.e., markup) shock. Differently from what occurs in sticky price models, the antiattenuation effect can result in a degree of price level stabilization that is greater or less than that experienced in the rational expectation model, depending on the central bank's degree of conservatism. These results dramatically affect the rationale for delegating monetary policy to a central banker more conservative than the society.

Keywords

Robust ControlSticky InformationMinmax PoliciesDelegation
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 3 , June 2010 , pp. 311 - 342
Copyright
Copyright © Cambridge University Press 2010

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