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Optimal Policy Projections Author info | Abstract | Publisher info | Download info | Related research | Statistics Svensson, Lars O
Tetlow, Robert J
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We outline a method to provide advice on optimal monetary policy while taking policymakers’ judgment into account. The method constructs optimal policy projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board staff economic model, FRB/US, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections — of target variables, instruments, and other variables of interest — that minimize that loss function for given judgment terms. The method is illustrated by revisiting the economy of early 1997 as seen in the Greenbook forecasts of February 1997 and November 1999. In both cases, we use the vintage of the FRB/US model that was in place at that time. These two particular forecasts were chosen, in part, because they were at the beginning and the peak, respectively, of the late 1990s boom period. As such, they differ markedly in their implied judgments of the state of the world in 1997 and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
839.
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Date of creation: 08 Aug 2005Date of revision:
Publication status: Published in International Journal of Central Banking Number 3.Volume 2(2005): pp. 177-207Handle: RePEc:pra:mprapa:839Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany Phone: +49-(0)89-2180-2219 Fax: +49-(0)89-2180-3900 Web page: http://mpra.ub.uni-muenchen.de More information through EDIRC
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Find related papers by JEL classification: G00 - Financial Economics - - General - - - General G0 - Financial Economics - - General
This paper has been announced in the following NEP Reports :
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.: Lars E O Svensson, 2005.
"Monetary Policy with Judgment: Forecast Targeting ,"
International Journal of Central Banking ,
International Journal of Central Banking, vol. 1(1), May.
[Downloadable!]
Other versions:
Svensson, Lars O, 2005.
"Monetary Policy with Judgment: Forecast Targeting ,"
MPRA Paper
819, University Library of Munich, Germany.
[Downloadable!] Lars E.O. Svensson, 2005.
"Monetary Policy with Judgment: Forecast Targeting ,"
NBER Working Papers
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[Downloadable!] (restricted) Lars E. O. Svensson, 2005.
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Working Paper Series
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CEPR Discussion Papers
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Other versions: David Reifschneider & Robert Tetlow & John Williams, 1999.
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Federal Reserve Bulletin ,
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Hansen, Lars Peter & Sargent, Thomas J., 2003.
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Other versions: Ray C. Fair & John B. Taylor, 1980.
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"What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules ,"
Journal of Economic Literature ,
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Finance and Economics Discussion Series
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Alan Greenspan, 2004.
"Risk and Uncertainty in Monetary Policy ,"
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Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001.
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NBER Working Papers
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[Downloadable!] (restricted)
Other versions:
Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001.
"Nominal rigidities and the dynamic effects of a shock to monetary policy ,"
Working Paper Series
WP-01-08, Federal Reserve Bank of Chicago.
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"Nominal rigidities and the dynamic effects of a shock to monetary policy ,"
Working Paper
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"Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy ,"
Journal of Political Economy ,
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[Downloadable!]
J. Tetlow, Robert & von zur Muehlen, Peter, 2001.
"Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy? ,"
Journal of Economic Dynamics and Control ,
Elsevier, vol. 25(6-7), pages 911-949, June.
[Downloadable!] (restricted)
Other versions: Flint Brayton & Eileen Mauskopf & David Reifschneider & Peter Tinsley & John Williams, 1997.
"The role of expectations in the FRB/US macroeconomic model ,"
Federal Reserve Bulletin ,
Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 227-245.
[Downloadable!]
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