TY  - JOUR
AU  - Svensson,Lars
AU  - Williams,Noah
TI  - Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11733
PY  - 2005
Y2  - November 2005
UR  - http://www.nber.org/papers/w11733
L1  - http://www.nber.org/papers/w11733.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

Noah M. Williams
Department of Economics
1180 Observatory Drive
University of Wisconsin
Madison, WI 53706-1393
Tel: 608/263-3864
E-Mail: nmwilliams@wisc.edu
AB  - We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts---fan charts---of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting."
ER  -