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Robust monetary policy under Knightian uncertainty

Author

Listed:
  • Q. Farooq Akram

    (Research Department Central Bank of Norway)

  • Yakov Ben-Haim

    (Israel Institute of Technology)

  • Øyvind Eitrheim

    (Central Bank of Norway)

Abstract

We employ a new decision-theoretic approach to dealing with Knightian uncertainty based on Simon's bounded rationality. The basic tool of this approach is a quantitative answer to the question: For a specified policy, among a set of policies, how much can our assumptions regarding e.g. model and data vary, without rendering the outcome of that policy unacceptable? For a given acceptable level of performance the policymaker selects the most robust policy. We implement this approach within the context of an econometric macromodel for Norway and derive robust monetary policy rules when there is Knightian uncertainty regarding the persistence of demand and supply shocks.

Suggested Citation

  • Q. Farooq Akram & Yakov Ben-Haim & Øyvind Eitrheim, 2006. "Robust monetary policy under Knightian uncertainty," Computing in Economics and Finance 2006 414, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:414
    as

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    More about this item

    Keywords

    Robust monetary policy; Knightian uncertainty;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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