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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2010.06.003 Byline: Richard Dennis Abstract: Model uncertainty has the potential to change importantly how monetary policy is conducted, making it an issue that central banks cannot ignore. Using a standard new Keynesian business cycle model, this paper analyzes the behavior of a central bank that conducts policy under discretion while fearing that its model is misspecified. The main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is obtained because the central bank's desire for robustness directs it to assertively stabilize inflation, thereby mitigating the stabilization bias associated with discretionary policymaking. Second, the central bank's fear of model misspecification leads it to forecast future outcomes under the belief that inflation (in particular) will be persistent and have large unconditional variance, raising the probability of extreme outcomes. Private agents, however, anticipating the policy response, make decisions under the belief that inflation will be more closely stabilized, that is, more tightly distributed, than under rational expectations. Finally, as a technical contribution, the paper shows how to solve with robustness an important class of linear-quadratic decision problems. Author Affiliation: Federal Reserve Bank of San Francisco, USA Article History: Received 20 November 2007; Revised 4 June 2010; Accepted 4 June 2010

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2009.02.011 Byline: Richard Dennis (a), Kai Leitemo (b), Ulf Soderstrom (c) 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, L.P., Sargent T.J., 2008. Robustness. Princeton University Press; Giordani, P., Soderlind, P., 2004. Solution of macromodels with Hansen-Sargent robust policies: some extensions. Journal of Economic Dynamics and Control 28 (12), 2367-2397]. In this paper we show that the structural-form methods developed by Dennis [2007. Optimal policy rules in rational-expectations models: new solution algorithms. Macroeconomic Dynamics 11 (1), 31-55] 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 state-space form. In addition, we show how to implement two different timing assumptions with distinct implications for the robust policy and the economy. We apply our methods to a New Keynesian Dynamic Stochastic General Equilibrium model and find that robustness has important effects on policy and the economy. Author Affiliation: (a) Economic Research Department, Mail Stop 1130, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, USA (b) Norwegian School of Management (BI), Norway (c) Sveriges Riksbank and CEPR, Sweden Article History: Received 26 September 2008; Accepted 12 February 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2007.08.002 Byline: Richard Dennis (a), Federico Ravenna (b) Abstract: To conduct policy efficiently, central banks must use available data to infer, or learn, the relevant structural relationships in the economy. However, because a central bank's policy affects economic outcomes, the chosen policy may help or hinder its efforts to learn. This paper examines whether real-time learning allows a central bank to learn the economy's underlying structure and studies the impact that learning has on the performance of optimal policies under a variety of learning environments. Our main results are as follows. First, when monetary policy is formulated as an optimal discretionary targeting rule, we find that the rational expectations equilibrium and the optimal policy are real-time learnable. This result is robust to a range of assumptions concerning private-sector learning behavior. Second, when policy is set with discretion, learning can lead to outcomes that are better than if the model parameters are known. Finally, if the private sector is learning, then unannounced changes to the policy regime, particularly changes to the inflation target, can raise policy loss considerably. Author Affiliation: (a) Federal Reserve Bank of San Francisco, 101 Market St, CA 94105, USA (b) Department of Economics, University of California, Santa Cruz, CA 95064, USA Article History: Received 2 November 2006; Accepted 2 August 2007

Algorithms that solve for optimal simple monetary policy rules in rational expectations models are presented. A comparative study of the model with precommitment and discretion showed that time-inconsistency did not affect economic outcomes in the Rudebusch model, but was important in Fuhrer-Moore model.

A study involving the structural understanding of monetary policy by estimating a policy maker's function, and by deriving the conditions under which the parameters in a policy maker's policy objective function can be identified and estimated is presented.

An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable. This paper examines this issue using an estimated model of the Australian economy. In contrast to microfounded models, according to this model policymakers should allow for movements in the real exchange rate and the terms-of trade when they set interest rates. Further, taking real exchange rate movements into account appears even more important with price level targeting than with inflation targeting. 'Monetary policy will continue to be conducted according to the medium-term principles contained in our inflation targeting approach. This means that the exchange rate will be taken into account, along with other variables that contribute to our inflation outlook' (Macfarlane, December 2000, p. 6).

Ball (1999) uses a small closed economy model to show that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. Allowing inflation expectations to be formed by the more general mixed expectations process, which encompasses Ball's model, we show that nominal GDP targeting is unlikely to lead to instability. We further show that in Ball's model where exact targeting causes instability that moving to inexact targeting restores stability.

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-4932.2009.00532.x Byline: Richard Dennis (1) Author Affiliation: (1)Federal Reserve Bank of San Francisco

Social disorganisation theory and economic theory posit relationships between crime and socio-economic conditions of an area. This article examines those relationships by analysing, for the first time, data for 322 local authorities in England. Significant determinants of property crime rates are found to be deprivation, the percentage of young people in the population, density of population/urbanisation, and movement in and out of the area. The variables found to be associated with violent crime are deprivation, density of population, population movements, and ethnic heterogeneity. Our results confirm much previous research but add fresh insights, especially regarding demographic distributions and population movements. [ABSTRACT FROM AUTHOR]

Examines the demand and cost conditions under the utility maximizing pricing-risk and advertising-risk in the United States. Structure of the demand of the firm; Restrictions of the standard demand and constant marginal cost; Symmetry between price-cuts and advertising.