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Monetary Policy with Judgment

Paolo Gelain () and Simone Manganelli ()

No 202014, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We consider two approaches to incorporate judgment into DSGE models. First, Bayesian estimation indirectly imposes judgment via priors on model parameters, which are then mapped into a judgmental interest rate decision. Standard priors are shown to be associated with highly unrealistic judgmental decisions. Second, judgmental interest rate decisions are directly provided by the decision maker and incorporated into a formal statistical decision rule using frequentist procedures. When the observed interest rates are interpreted as judgmental decisions, they are found to be consistent with DSGE models for long stretches of time, but excessively tight in the 1980s and late 1990s and excessively loose in the late 1970s and early 2000s.

JEL-codes: C12 E47 E50 E58 (search for similar items in EconPapers)
Pages: 44
Date: 2020-05-21
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-mac, nep-mon and nep-ore
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https://doi.org/10.26509/frbc-wp-202014 Full Text

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DOI: 10.26509/frbc-wp-202014

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