Working Paper: CEPR ID: DP8176
Authors: Stefan Lasen; Lars E. O. Svensson
Abstract: 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.
Keywords: instrument rules; optimal monetary policy; optimal policy projections; policy rules
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated policy-rate paths (E52) | economic outcomes (F61) |
| central bank announces a policy-rate path believed by the private sector (E52) | unique equilibrium in the economy (D59) |
| projections with anticipated policy-rate paths (E37) | effective monetary policy (E52) |
| models without forward-looking variables (C51) | no significant difference between anticipated and unanticipated restrictions (D84) |
| models with forward-looking variables (C51) | anticipated restrictions yield larger impacts on economic variables (F69) |
| prolonged restrictions on nominal policy rates (E43) | unusual equilibria (D59) |
| interplay between nominal and real rates (E43) | significant economic implications (F69) |
| timing and nature of policy announcements (E60) | shaping economic expectations and outcomes (D84) |