ROBUST MONETARY POLICY IN THE NEW KEYNESIAN FRAMEWORK

We study the effects of model uncertainty in a simple New Keynesian model using robustcontrol techniques. Due to the simple model structure, we are able to find closed-formsolutions for the robust control problem, analyzing both instrument rules and targetingrules under different timing assumptions. In all cases but one, an increased preference forrobustness makes monetary policy respond more aggressively to cost shocks but leavesthe response to demand shocks unchanged. As a consequence, inflation is less volatile andoutput is more volatile than under the nonrobust policy. Under one particular timingassumption, however, increasing the preference for robustness has no effect on the optimaltargeting rule (nor on the economy).[...]