DP8176 Anticipated Alternative Instrument-Rate Paths in Policy Simulations

Author(s): Stefan Laséen, Lars E O Svensson
Publication Date: January 2011
Keyword(s): instrument rules, Optimal monetary policy, optimal policy projections, policy rules
JEL(s): E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8176

This paper specifies a new convenient algorithm to construct policy projections conditional on alternative anticipated policy-rate paths in linearized dynamic stochastic general equilibrium (DSGE) models, such as Ramses, the Riksbank's main DSGE model. Such projections with anticipated policy-rate paths correspond to situations where the central bank transparently announces that it, conditional on current information, plans to implement a particular policy-rate path and where this announced plan for the policy rate is believed and then anticipated by the private sector. The main idea of the algorithm is to include among the predetermined variables (the 'state' of the economy) the vector of nonzero means of future shocks to a given policy rule that is required to satisfy the given anticipated policy-rate path.