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Scenario discovery to address deep uncertainty in monetary policy

Author

Listed:
  • Wieles, Chamon
  • Kwakkel, Jan
  • Auping, Willem L.
  • van den End, J.W.

Abstract

We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty.

Suggested Citation

  • Wieles, Chamon & Kwakkel, Jan & Auping, Willem L. & van den End, J.W., 2025. "Scenario discovery to address deep uncertainty in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:dyncon:v:179:y:2025:i:c:s0165188925001344
    DOI: 10.1016/j.jedc.2025.105168
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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