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Long-run Growth and Short-run Stabilization

Essays in Memory of Albert Ando

Edited by Lawrence R. Klein

There is much confusion in the economics literature on wage determination and the employment–inflation trade-off. Few model builders pay as much careful attention to the definition and meaning of long-run concepts as did Albert Ando. Expanding on years of painstaking work by Ando, the contributors elaborate on the main issues of economic analysis and policies that concerned him.
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Chapter 6: On Robust Monetary Policy

Filippo Altissimo, Stefano Siviero and Daniele Terlizzese


* Filippo Altissimo, Stefano Siviero and Daniele Terlizzese 1. INTRODUCTION The notion of ‘robust monetary policy’ – a monetary policy whose stabilization properties remain relatively good irrespective of the true model of the economy – has recently attracted considerable attention. The main reason for the interest in the subject is well exemplified in a recent paper by Levin et al. (2003). Considering five different and widely used models of the US economy, Levin et al. show that the monetary policy rule that would be optimal (within a fairly general class of rules) for each single model could be a real disaster if one of the other models were to be the true representation of the economy. Levin and Williams (2003) conduct a similar experiment using three different models of the US economy. The results are not typical of the USA. Coenen (2003) and Adalid et al. (2004) find a similar lack of robustness considering two (respectively, four) alternative models of the euro area economy. The various models considered differ along several dimensions. Yet, when testing the robustness of monetary policy rules an important role seems to be played by differences in the degree of inertia (of both inflation and output). This makes these findings particularly worrying, at least from a monetary policy perspective, since the degree of nominal inertia of the economy – or, to put it differently, the nature of the Phillips curve – is not yet well understood. As Mankiw (2001) recently wrote, ‘the dynamic relationship...

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