Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model1

We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of in‡ation and a suitably de…ned output gap, but that a concern for robustness requires greater resistance to surprise increases in in‡ation than would be considered optimal if one could count on the private sector to have “rational expectations.” JEL Nos. D81, D84, E52