Robust control with commitment: A modification to Hansen-Sargent

Dennis, R. (2008) Robust control with commitment: A modification to Hansen-Sargent. Journal of Economic Dynamics and Control, 32(7), pp. 2061-2084. (doi: 10.1016/j.jedc.2007.08.003)

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I examine the Hansen and Sargent [2003. Robust control of forward-looking models. Journal of Monetary Economics 50, 581–604] formulation of the robust Stackelberg problem and show that their method of constructing the approximating equilibrium is generally invalid. I then turn to the Hansen and Sargent [2007. Robustness, manuscript (version dated March 22, 2007)] treatment, which, responding to the problems raised in this paper, changes subtly, but importantly, how the robust Stackelberg problem is formulated. In the context of Hansen and Sargent [2007. Robustness, manuscript (version dated March 22, 2007)], I prove, first, that their method for obtaining the approximating equilibrium is now equivalent to the one developed in this paper, and, second, that the worst-case specification errors are not subject to a time-consistency problem. In the context of the Erceg et al. [2000. Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313] sticky wage/sticky price model, I find that a robust central bank will fear primarily that the supply side of its approximating model is misspecified and that robustness affects importantly central bank promises about future policy.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Dennis, Professor Richard
Authors: Dennis, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Economic Dynamics and Control

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