Robust Control and Persistence

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The study explores the impact of model uncertainty and persistent consumption and pricing behavior within New Keynesian models, which integrate rigid price assumptions with modern macroeconomic methods. It examines how central banks set interest rates amidst economic uncertainty using robust control methods to analyze worst-case scenarios. The findings suggest that rule-based monetary policy, relying on influencing economic expectations, can destabilize the economy when uncertainty is unfounded, raising questions about the effectiveness of commitment strategies in monetary policy.