Research and publications

Optimal Interest Rate Smoothing under Model Ambiguity

This paper solves for the equilibrium of a standard real business cycle model with money under model ambiguity. It first shows that monetary certainty is a sufficient condition for an interest rate smoothing rule to be optimal even under preferences for model robustness on the part of private agents. It then derives the necessary and sufficient condition for a stochastic (but stationary) monetary policy to reproduce the equilibrium of the real economy and compute the optimal (constant) level of the nominal interest rate. A revisited version of this paper was published in the December 2012 issue of the Journal of Macroeconomics.

Author(s):

Abraham Lioui, Patrice Poncet

Summary:

This paper solves for the equilibrium of a standard real business cycle model with money under model ambiguity. It first shows that monetary certainty is a sufficient condition for an interest rate smoothing rule to be optimal even under preferences for model robustness on the part of private agents. It then derives the necessary and sufficient condition for a stochastic (but stationary) monetary policy to reproduce the equilibrium of the real economy and compute the optimal (constant) level of the nominal interest rate. A revisited version of this paper was published in the December 2012 issue of the Journal of Macroeconomics.

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Type :	Working paper
Date :	09/07/2009
Keywords :	Monetary Policy

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