Optimal monetary policy delegation in a small-open new Keynesian model with robust control

This study examines the optimal monetary policy delegation in a small-open new Keynesian model with model uncertainty. We show that under the worst-case equilibrium, nominal income growth targeting outperforms the considered alternative delegation regimes. We find that the response of the nominal ex...

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Bibliographic Details
Published inEconomic modelling Vol. 120; p. 106154
Main Authors Ida, Daisuke, Okano, Mitsuhiro
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.03.2023
Subjects
New Keynesian model
Optimal monetary policy
Robust control
Small-open economy
Targeting regime
Robust control
Small-open economy
F41
E52
Optimal monetary policy
E58
New Keynesian model
Targeting regime
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Summary:This study examines the optimal monetary policy delegation in a small-open new Keynesian model with model uncertainty. We show that under the worst-case equilibrium, nominal income growth targeting outperforms the considered alternative delegation regimes. We find that the response of the nominal exchange rate depends on the specifications of the delegated targeting regimes. Finally, introducing endogenous inflation persistence into the benchmark model does not affect our main findings. •We consider the optimal delegation problem in a small-open new Keynesian model.•Nominal income growth targeting outperforms the alternative delegation regimes.•The exchange rate response depends on targeting rule specifications.•The benchmark result is robust to introducing inflation persistence.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2022.106154