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Article Citation - WoS: 1Citation - Scopus: 1Model Uncertainty and Financial Frictions: Implications for Optimal Monetary Policy(World Scientific, 2024) Kantur,Z.; Özcan,G.The last decades proved that policymaking without considering uncertainty is impracticable. In an environment of uncertainty, policymakers have doubts about the policy models they routinely use. This paper focuses specifically on the situation where uncertainty on the financial side of the economy leads to misspecification in the policy model. We describe a coherent strategy for policymakers who are averse to model misspecification and analyze optimal policy design in the face of Knightian uncertainty. To do so, we augment a financial dynamic stochastic general equilibrium model with model misspecification in a simple minimax framework where the central bank plays a zero-sum game versus a hypothetical evil agent. The policy is tailored to insure against the worstcase outcomes. We show that model ambiguity on the financial side requires a passive monetary policy stance. However, if the uncertainty originates from the supply side of the economy, an aggressive response of interest rate is required. We also show the impact of an additional macroprudential tool on the dynamics of the economy. © 2024 World Scientific Publishing Company.Article Citation - WoS: 1Citation - Scopus: 1Optimal Robust Monetary and Fiscal Policy Under Uncertainty on the Lower Bound(Elsevier, 2024) Ozcan, Gulserim; Traficante, GuidoThis paper studies robust policy when the policymaker has Knightian uncertainty about the exact position of the effective lower bound (ELB). First, we characterize optimal discretionary policy when a benevolent policymaker controls the nominal interest rate and the level of government spending. Compared to the full information case, an uncertainty -averse policymaker overestimates the level of the ELB, thereby triggering a more aggressive reduction in the nominal interest rate prior to the liquidity trap. Furthermore, the anticipation of a larger increase in public spending improves the trade-off between inflation and the output gap, and dampens the perceived worst -case level of the ELB. As a result, a less conservative fiscal stabilization is desirable to address the uncertainty concerns of the policymaker by partially substituting for the nominal interest rate at the ELB. Moreover, an inflation -conservative policymaker mitigates the impact of uncertainty on equilibrium outcomes even better than a fiscally active policymaker.
