Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach

Lars E.O. Svensson () and Noah Williams ()

No 13892, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the design of optimal monetary policy under uncertainty in a dynamic stochastic general equilibrium models. We use a Markov jump-linear-quadratic (MJLQ) approach to study policy design, approximating the uncertainty by different discrete modes in a Markov chain, and by taking mode-dependent linear-quadratic approximations of the underlying model. This allows us to apply a powerful methodology with convenient solution algorithms that we have developed. We apply our methods to a benchmark New Keynesian model, analyzing how policy is affected by uncertainty, and how learning and active experimentation affect policy and losses.

JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
Date: 2008-03
Note: EFG ME
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Working Paper: Optimal Monetary Policy Under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach (2008)
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