High trend inflation leads to volatile economy under aggressive monetary policy.
The article explores how uncertainty in economic models affects fluctuations when inflation is high. By using robust control techniques in a New Keynesian model with non-zero trend inflation, the researchers found that robust monetary policy reacts more aggressively as trend inflation increases. This leads to larger responses in economic variables under robust policy, potentially causing volatility in the economy when trend inflation is high. The study suggests that model uncertainty could be a factor contributing to significant fluctuations in the economy under these conditions.