Woodford's approach to robust policy analysis in a linear-quadratic framework
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Citation (published version)Jianjun Miao, Hyosung Kwon. 2019. "WOODFORD'S APPROACH TO ROBUST POLICY ANALYSIS IN A LINEAR-QUADRATIC FRAMEWORK." Macroeconomic Dynamics, Volume 23, Issue 5, pp. 1895 - 1920 (25). https://doi.org/10.1017/s1365100517000499
This paper extends Woodford's approach to the robustly optimal monetary policy to a general linear quadratic framework. We provide algorithms to solve for a time-invariant linear robustly optimal policy in a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretion. We apply our methods to a New Keynesian model of monetary policy with persistent cost-push shocks and inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation when inflation is more persistent.