Forward Guidance and Stochastic Shocks

Stochastic simulations
1

Hello everyone,

I would like to simulate different stochastic shocks (e.g., a TFP shock) while assuming that the central bank has committed to forward guidance and can only adjust its interest rate after X periods (after which it follows a simple Taylor rule).

Is it possible to implement this using stochastic simulations (e.g., by introducing additional news shocks that keep the nominal interest rate constant)? Or would I need to switch to a perfect foresight simulation, as done in “NK_linear_forward_guidance.mod”, where forward guidance is implemented, and the additional shock is no longer modeled as a stochastic shock?

Is there a way in Dynare to combine both worlds, stochastic shocks with known forward guidance?

2

Yes, you could do news shocks but that does only make sense if you go to higher order. Otherwise, perfect foresight is easier and more accurate.

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