No. 248 Anticipated Alternative Policy-Rate Paths in Policy Simulations

by Stefan Laséen and Lars E.O. Svensson

JANUARY 2011

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.

JEL Classification

E52, E58

Keywords

Optimal monetary policy, instrument rules, policy rules, optimal policy projections