How robustness can change the desirability of speed limit policy

This paper investigates a robust monetary policy under speed limit policy when a central bank fears model misspecification. We reveal several points. First, the persistence of the output gap becomes small with the robust speed limit policy. The low persistence of the output gap contributes to mitigating the variance of the output gap. Second, for a robust policy, social losses are lower under the speed limit policy than under precommitment. Our results suggest that adding the growth of the output gap to the central bank’s objectives is effective when the worst-case scenario is realized.