Caution in macroeconomic policy: uncertainty and the relative intensity of policy
AbstractTwo lines of literature show that increased uncertainty results in decreased vigor of the control variable in the first time period. The first line uses static models, the second dynamic. Here, the dynamic line is extended from one-state, one-control models to ones with two control variables. We confirm the Johansen result from the static line that, in this case, one control is used less intensely and the other more intensely when current uncertainty is increased. We then extend this result to models with zero weights on the controls, giving a linear complementarity outcome. Analyses from both lines of the literature effectively involve single-period results, since even the dynamic line has focused on the effects of current uncertainty. Here we follow a suggestion from Craine to extend the results to a multiperiod framework. Using the Riccati equations, we study the effects of increased uncertainty in a future time period on the use of controls in the first time period. We find, contrary to the single-period results, that the outcomes reveal that both control variables (or at least one, depending of the relative magnitude of first-period control parameter weighted variances) are used more, rather than less, intensely.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 68 (2000)
Issue (Month): 1 (July)
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Web page: http://www.elsevier.com/locate/ecolet
Other versions of this item:
- P. Ruben Mercado & David Kendrick, 1999. "Caution in Macroeconomic Policy: Uncertainty and the Relative Intensity of Policy," Computing in Economics and Finance 1999 1343, Society for Computational Economics.
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