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Robust Monetary Policy With Misspecified Models: Does Model Uncertainty Always Call For Attenuated Policy?
Social Science Research Network
This paper explores Knightian model uncertainty as a possible explanation of the considerable difference between estimated interest rate rules and optimal feedback descriptions of monetary policy. We focus on two types of uncertainty: (i) unstructured model uncertainty reflected in additive shock error processes that result from omitted-variable misspecifications, and (ii) structured model uncertainty, where one or more parameters are identified as the source of misspecification. For andoi:10.2139/ssrn.231976 fatcat:23iueipmjzcunpdg4kivh765xa