Robustly Optimal Monetary Policy in a Behavioral Environment

Abstract This paper studies robustly optimal monetary policy with myopic agents in a behavioral New Keynesian model. The central bank is assumed to have Knightian uncertainty about the degree of myopia and the degree of price stickiness. We show that, under uncertainty about myopia, the Brainard’s attenuation principle holds under commitment and discretion, while, under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive. Welfare evaluation shows significant gains from a robust conduct of monetary policy when the model is distorted.