Norges Bank

Working Paper

Monetary policy under uncertainty: Min-max vs robust-satisficing strategies

Author:
By Yakov Ben-Haim, Q. Farooq Akram and Øyvind Eitrheim.
Series:
Working Paper
Number:
6/2007

We study monetary policy under uncertainty. A policy which ameliorates a worst case may differ from a policy which maximizes robustness and satisfices the performance. The former strategy is min-maxing and the latter strategy is robust-satisficing. We show an “observational equivalence” between robust-satisficing and min-maxing. However, there remains a “behavioral difference” between robust-satisficing and min-maxing. Policy makers often wish to respect specified bounds on target variables. The robust-satisficing policy can be more (and is never less) robust, and hence more dependable, than the min-max policy. We illustrate this in an empirical example where monetary policy making amounts to selecting the coefficients of a Taylor-type interest rate rule, subject to uncertainty in the persistence of shocks to inflation.

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ISSN 1502-8190 (online)

Published 5 December 2007 13:30
Published 5 December 2007 13:30