TY  - JOUR
AU  - Svensson,Lars O.
AU  - Tetlow,Robert J.
TI  - Optimal Policy Projections
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11392
PY  - 2005
Y2  - June 2005
UR  - http://www.nber.org/papers/w11392
L1  - http://www.nber.org/papers/w11392.pdf
N1  - Author contact info:
Lars E.O. Svensson
Sveriges Riksbank
SE-103 37 Stockholm
SWEDEN
Tel: +46 8 787 0107
Fax: +46 8 21 0531
E-Mail: lars.svensson@iies.su.se

Robert Tetlow
Federal Reserve Board
20th and C Streets, NW
Washington, D.C.
20551
E-Mail: robert.j.tetlow@frb.gov
AB  - 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's FRB/US model, 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 Greenbook forecasts of February 1997 and November 1999, in each case using 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, and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations.
ER  -