Abstract

Recent research in monetary economics has investigated the robustness properties of monetary policy rules. In this paper, I first show that the robustly optimal instrument rules of Giannoni and Woodford and the min-max robust control approach of Hansen and Sargent lead to the same instrument rules for monetary policy. I then evaluate the performance deterioration that occurs when the central bank employs a policy rule that is based on incorrect parameter values. I focus on two parameters -- the degree of inflation inertia and the degree of price stickiness. Unlike most previous research, I explicitly account for the effects of the structural parameters on the objective function used to evaluate outcomes. I also assess the costs of using simple rules relative to the costs of parameter misspecification.

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