Ozcan, GulserimTraficante, GuidoEconomics2024-07-052024-07-05202400164-07041873-152X10.1016/j.jmacro.2024.1036052-s2.0-85193440322https://doi.org/10.1016/j.jmacro.2024.103605https://hdl.handle.net/20.500.14411/2267This 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.eninfo:eu-repo/semantics/closedAccessMonetary policyFiscal policyDiscretionLiquidity trapRobust controlKnightian uncertaintyArticleQ381WOS:001244570400001