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Robust Policies In A Sticky Information Economy

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  • Giuli, Francesco

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.

Suggested Citation

  • Giuli, Francesco, 2010. "Robust Policies In A Sticky Information Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(3), pages 311-342, June.
    • Handle: RePEc:cup:macdyn:v:14:y:2010:i:03:p:311-342_00
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    Cited by:

    1. Jacob Engwerda & Davoud Mahmoudinia & Rahim Dalali Isfahani, 2016. "Government and Central Bank Interaction under Uncertainty: A Differential Games Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(2), pages 225-259, Spring.
    2. Di Bartolomeo, Giovanni & Giuli, Francesco, 2011. "Fiscal and monetary interaction under monetary policy uncertainty," European Journal of Political Economy, Elsevier, vol. 27(2), pages 369-375, June.
    3. Z. Nikooeinejad & M. Heydari & M. Saffarzadeh & G. B. Loghmani & J. Engwerda, 2022. "Numerical Simulation of Non-cooperative and Cooperative Equilibrium Solutions for a Stochastic Government Debt Stabilization Game," Computational Economics, Springer;Society for Computational Economics, vol. 59(2), pages 775-801, February.
    4. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 369-394, March.

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