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Robust Monetary Policy in a Small Open Economy
2005
Social Science Research Network
We study how a central bank in a small open economy should conduct monetary policy if it fears that its model is misspecified. Using a New Keynesian model of a small open economy, we solve analytically for the optimal robust policy rule and the equilibrium dynamics, and we separately analyze the consequences of central bank robustness against misspecification concerning the determination of inflation, output, and the exchange rate. We show that an increase in the preference for robustness may
doi:10.2139/ssrn.727703
fatcat:nv3ozk6bxnhmbfrdz7chtuy6dy