Monetary Policy with Model Uncertainty: Distribution Forecast Targeting

Noah Williams and Lars Svensson

No 108, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We examine optimal and other monetary policies in a linear-quadratic setup with relatively general forms of model uncertainty. The forms of uncertainty our framework encompasses include: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty, such as uncertainty about a set of structurally very different models, for instance, backward- and forward-looking models; 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 reaction 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 the more general certainty non-equivalence and "distribution forecast targeting."

Keywords: monetary policy; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 E52 (search for similar items in EconPapers)
Date: 2005-11-11
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Citations: View citations in EconPapers (55)

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Related works:
Working Paper: Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (2007)
Working Paper: Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (2005)
Working Paper: Monetary policy with model uncertainty: distribution forecast targeting (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:108

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