Monetary Policy, Doubts and Asset Prices
Luiss Guido Carli; EIEF Einaudi Institute for Economics and Finance
New Keynesian DSGE model with doubts and ambiguity aversion (robust control framework of Hansen-Sargent), capital accumulation with adjustment costs, Calvo price stickiness, and monopolistic competition. Households distrust the reference probab
intermediate firms: monopolistic competition with Calvo pricing; final goods: perfect competition with Dixit-Stiglitz aggregation
Table 1 p.17
Optimal policy under model uncertainty psi=150, matches observed equity premium
Authors state psi=150 matches the average U.S. equity premium of 5.5% per year (p.15), making it the empirically relevant calibration