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

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

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Lars E.O. Svensson
Noah Williams

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Lars E. O. Svensson

Abstract

We study the design of optimal monetary policy under uncertainty in a dynamic stochastic general equilibrium model. We use a Markov jump-linear-quadratic (MJLQ) approach to study policy design, proxying 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 testing affect policy and losses.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 484.

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Date of creation: Sep 2008
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Handle: RePEc:chb:bcchwp:484

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Paper
- Lars E.O. Svensson & Noah Williams, 2008. "Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach," NBER Working Papers 13892, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

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Other versions:
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Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
Other versions:
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Other versions:
- Lars Svensson & Noah Williams, 2005. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," NBER Working Papers 11733, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Other versions:
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