Imperfect knowledge and the pitfalls of optimal control monetary policy
Sixty years ago, Milton Friedman questioned the usefulness of the optimal control approach because of policymakers’ imperfect knowledge of the economy and favored instead a simple rule approach to monetary policy (1947, 1948). These are still live issues, despite the development of powerful techniqu...
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| Autores principales: | , |
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| Formato: | Artículo |
| Lenguaje: | eng |
| Publicado: |
Banco Central de Chile
2019
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| Materias: | |
| Acceso en línea: | https://hdl.handle.net/20.500.12580/3748 |
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| Sumario: | Sixty years ago, Milton Friedman questioned the usefulness of the optimal control approach because of policymakers’ imperfect knowledge of the economy and favored instead a simple rule approach to monetary policy (1947, 1948). These are still live issues, despite the development of powerful techniques to derive and analyze optimal control policies, which central banks use in their large-scale models (see Svensson and Woodford, 2003, Woodford, 2003, Giannoni and Woodford, 2005, Svensson and Tetlow, 2005). Although the optimal control approach provides valuable insights, it also presents problems. In particular, because it assumes a single correctly specified reference model, it ignores important sources of uncertainty about the economy that monetary policymakers face. Robust control methods of the type analyzed by Hansen and Sargent (2007) extend the standard optimal control approach to allow for unspecified model uncertainty, however, these methods are designed for relatively modest deviations from the reference model |
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