A Continuous Minimax Problem and its Application to Inflation Targeting
In this paper we apply an algorithm for continuous minimax problems to a simple macroeconomic model with an inflation-targeting central bank. The algorithm uses a quasi—Newton direction conditional on appropriate maximizers, where the direction involves a quadratic subproblem to compute the minimum norm subgradient. The model and parameter estimates are taken from Orphanides and Wieland  who have used it to analyze inflation zone versus point targeting. In this paper, however, the approach to monetary policy design is different as we minimize the worst—case with respect to inflation and economic activity. We compare the resulting policy recommendations under worst-case scenarios with those of the H ∞ approach, which has recently been applied to monetary policy by several authors.
KeywordsInterest Rate Monetary Policy Uncertain Variable Nominal Interest Rate Phillips Curve
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