Monetary policy with model uncertainty: distribution forecast targeting

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

No 2005,35, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: 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 regimeswitching 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.?

Keywords: Optimal policy; multiplicative uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E42 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-knm, nep-mac, nep-mon and nep-upt
Date: 2005
View list of references View citations in EconPapers

Downloads: (external link)
http://hdl.handle.net/10419/19620 (application/pdf)

Related works:
Working Paper: Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (2005)
Working Paper: Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (2007)
Working Paper: Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp1:4229

Access Statistics for this paper

More papers in Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre
Contact information at EDIRC.
Series data maintained by ZBW - German National Library for Economics ().