Abstract

One of the prominent ways to analyze the robustness of monetary policy under model uncertainty consists of the following three steps. First, choose a reference model of the economy. Next, define a set of perturbations around this model, where the set is structured so that the uncertainty is focused on potentially important weaknesses of the reference model. Finally, choose policy so that it works best for the worst model from the set. Previous applications of this approach allowed only for purely backward-looking models. This paper extends the analysis of robustness to models that may include forward-looking components. Empirical part of the paper studies simple policy rules under model, data and shock uncertainty in a small model of the US economy with rational expectations. Key words: structured uncertainty, rational expectations, robustness.

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