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

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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• Lars E.O. Svensson & Noah Williams, 2009. " Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach ," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 3, pages 077-114, Central Bank of Chile.

• 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.

References listed on IDEAS

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Edward Herbst & David Lopez-Salido & Christopher Gust, 2017. " Forward Guidance with Bayesian Learning and Estimation ," 2017 Meeting Papers 1189, Society for Economic Dynamics.

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JEL classification:

• E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
• 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

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