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An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations

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  • Michael Woodford

Abstract

This paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely model-consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL: E52) (c) 2006 by the European Economic Association.

Suggested Citation

  • Michael Woodford, 2006. "An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 386-395, 04-05.
    • Handle: RePEc:tpr:jeurec:v:4:y:2006:i:2-3:p:386-395
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    Citations

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    Cited by:

    1. Michael Woodford, 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations," American Economic Review, American Economic Association, vol. 100(1), pages 274-303, March.
    2. Martin Ellison & Thomas J. Sargent, 2012. "A Defense Of The Fomc," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1047-1065, November.
    3. Vidakovic, Neven, 2014. "Exchange rate regime and household's choice of debt," MPRA Paper 54219, University Library of Munich, Germany.
    4. Neven Vidakovic, 2015. "Bank’s choice of loan portfolio under high regulation – example of Croatia," FIP - Journal of Finance and Law, Effectus - University College for Law and Finance, vol. 2(1), pages 29-44.
    5. Cosmin Ilut, 2012. "Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 33-65, July.
    6. Pierre-Edouard Collignon, 2021. "No Regret Fiscal Reforms," Working Papers 2021-20, Center for Research in Economics and Statistics.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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