Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099394 | Journal of Economic Dynamics and Control | 2008 | 24 Pages |
Abstract
I examine the Hansen and Sargent [2003. Robust control of forward-looking models. Journal of Monetary Economics 50, 581-604] formulation of the robust Stackelberg problem and show that their method of constructing the approximating equilibrium is generally invalid. I then turn to the Hansen and Sargent [2007. Robustness, manuscript (version dated March 22, 2007)] treatment, which, responding to the problems raised in this paper, changes subtly, but importantly, how the robust Stackelberg problem is formulated. In the context of Hansen and Sargent [2007. Robustness, manuscript (version dated March 22, 2007)], I prove, first, that their method for obtaining the approximating equilibrium is now equivalent to the one developed in this paper, and, second, that the worst-case specification errors are not subject to a time-consistency problem. In the context of the Erceg et al. [2000. Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281-313] sticky wage/sticky price model, I find that a robust central bank will fear primarily that the supply side of its approximating model is misspecified and that robustness affects importantly central bank promises about future policy.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Richard Dennis,