Monetary policy with model uncertainty
Subtitle: distribution forecast targeting
By: Lars E.O. Svensson, Noah Williams.
Contributors: Williams, Noah; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11733; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11733.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Monetary policy -- Mathematical models.; Uncertainty -- Mathematical models.; Economic forecasting -- Mathematical models.
Description: "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.""--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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