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Federal Reserve Bank of San Francisco
Working Paper Series
Methods for robust control
Richard Dennis
Kai Leitemo
Ulf Söderström
Abstract

Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent 2006 and Giordani and Soderlind 2004). In this paper we show that the structural-form methods developed by Dennis (2006) to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in statespace form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibria for robust control problems. We apply both state-space and structural solution methods to an empirical New Keynesian business cycle model and find that the differences between the methods are both qualitatively and quantitatively important. In particular, with the structural-form solution methods the specification errors generally involve changes to the conditional variances in addition to the conditional means of the shock processes.


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Richard Dennis & Kai Leitemo & Ulf Söderström, Methods for robust control, Federal Reserve Bank of San Francisco, Working Paper Series 2006-10, 2006.
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Keywords: Robust control ; Monetary policy ; Econometric models
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