Monetary Policy with Model Uncertainty: Distribution Forecast Targeting / Lars Svensson, Noah Williams.

Format:

Book

Author/Creator:

Svensson, Lars.

Contributor:

National Bureau of Economic Research.

Williams, Noah.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11733.

NBER working paper series no. w11733

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Monetary Policy with Model Uncertainty

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts---fan charts---of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting."

Notes:

Print version record

November 2005.