Robust Optimal Policies in Behavioral New Keynesian Macro Models

Uncertainty is a challenge for monetary policy. This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents’ heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities