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DEALING WITH UNCERTAINTY: ROBUST RULES IN MONETARY POLICY
Author(s) -
Demertzis Maria,
Tieman Alexander F.
Publication year - 2007
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2007.00416.x
Subject(s) - disappointment , robustness (evolution) , economics , certainty , risk aversion (psychology) , loss aversion , outcome (game theory) , microeconomics , monetary policy , expected utility hypothesis , econometrics , mathematical economics , macroeconomics , mathematics , psychology , social psychology , biochemistry , chemistry , geometry , gene
We argue that in seeking to insure against model uncertainty, monetary policy makers are often ready to trade ex post performance for greater certainty in the outcome. They thus look for rules that although not optimal ex post, have certain properties that qualify them as robust. We apply first, Gul's approach of ‘disappointment’ aversion to describe policy makers' aversion to uncertainty and then define the properties the notion of ‘robustness’ entails. With these two tools we then link the desirability of such robust rules to the degree of policy makers' aversion to uncertainty. We thus show that provided such robust rules exist, a larger degree of disappointment aversion leads to a greater emphasis on robustness in policy implementation.