Macroeconomic Dynamics, 13, 2009, 46–80. Printed in the United States of America. doi:10.1017/S1365100508070466 SATISFICING SOLUTIONS TO A MONETARY POLICY PROBLEM A Viability Theory Approach JACEK KRAWCZYK Victoria University Wellington KUNHONG KIM Hallym University Herbert A. Simon, 1978 Economics Nobel Prize laureate, talked about satisficing (his neologism) rather than optimizing as being what economists really need. Indeed, optimization might be an unsuitable solution procedure (in that it suggests a unique “optimal” solution) for problems where many solutions could be satisfactory. We think that looking for an applicable monetary policy is a problem of this kind because there is no unique way in which a central bank can achieve a desired inflation (unemployment, etc.) path. We think that it is viability theory, which is a relatively young area of mathematics, that rigorously captures the essence of satisficing. We aim to use viability analysis to analyze a simple macro policy model and show how some robust adjustment rules can be endogenously obtained. Keywords: Dynamic Systems, Viability Theory, Macroeconomic Modeling 1. INTRODUCTION The aim of this paper is to explore the usefulness of viability theory for the analysis and synthesis of an economic state-constrained decision-making problem. The problem concerns inflation targeting in a closed economy. The first author expresses gratitude to Kyoto Institute of Economic Research (KIER) at Kyoto University, Japan, for hosting him in 2004–2005, when he learned and researched viability theory and was writing this paper. Comments and suggestions by Patrick Saint-Pierre, Luc Doyen, Michel De Lara, Larry Christiano, Jack Robles, Richard Martin, Christopher Atkin, and Graeme Guthrie are gratefully acknowledged. Collaborative work with Rishab Sethi from the Reserve Bank of New Zealand toward calibration of a New Zealand simple macroeconomic model [see Krawczyk and Sethi (2007)] is highly appreciated. Confrontation of viability theory with real world data has been helping the authors to better understand the viability analysis. We thank two anonymous referees, the Associate Editor, and the Editor for the thorough reviews and questions there included, as well as for the overall comments on the paper and the approach to macro modeling that we are using. We think that the answers to the questions and the inclusion of the discussion outcomes on the more general issues related to the paper have significantly improved the message clarity contained in this paper. All errors and omissions remain ours. Address correspondence to: Jacek Krawczyk, School of Economics & Finance, Faculty of Commerce & Administration, Victoria University Wellington, Pipitea Campus, Rutherford House, P.O.Box 600 Wellington, New Zealand; e-mail: J.Krawczyk@vuw.ac.nz. c  2009 Cambridge University Press 1365-1005/09 46