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Should Macroeconomic Policy Makers Consider Parameter Covariances?

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Author Info
Amman, Hans M
Kendrick, David A

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Abstract

Many macroeconomic policy exercises consider the mean values of parameter estimates but do not use the variances and covariances. One can argue that the uncertainty of these parameter estimates is sufficiently small that it can safely be ignored. Or one can take the position that this kind of uncertainty cannot be avoided no matter what one does. Thus it is just as well to ignore it while making policy decisions. In this paper we address both of these positions in the presence of learning and find that they are unconvincing. To the contrary, we find evidence that the potential damage from ignoring the variances and covariances of the parameter estimates is substantial and that taking them into account can improve matters. Citation Copyright 1999 by Kluwer Academic Publishers.

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Article provided by Springer in its journal Computational Economics.

Volume (Year): 14 (1999)
Issue (Month): 3 (December)
Pages: 263-67
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Handle: RePEc:kap:compec:v:14:y:1999:i:3:p:263-67

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pohjola, Matti T., 1981. "Uncertainty and the vigour of policy Some implications of quadratic preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 3(1), pages 299-305, November. [Downloadable!] (restricted)
  2. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October. [Downloadable!] (restricted)
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  3. Shupp, Franklin R., 1976. "Uncertainty and optimal stabilization policy," Journal of Public Economics, Elsevier, vol. 6(3), pages 243-253, October. [Downloadable!] (restricted)
  4. Chow, Gregory C, 1973. "Effect of Uncertainty on Optimal Control Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 632-45, October. [Downloadable!] (restricted)
  5. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September. [Downloadable!] (restricted)
  6. Amman, Hans M. & Kendrick, David A., 1994. "Active learning Monte Carlo results," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 119-124, January. [Downloadable!] (restricted)
  7. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February. [Downloadable!] (restricted)
  8. Turnovsky, Stephen J, 1975. "Optimal Choice of Monetary Instrument in a Linear Economic Model with Stochastic Coefficients," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 7(1), pages 51-80, February. [Downloadable!] (restricted)
  9. Kendrick, David, 1982. "Caution and probing in a macroeconomic model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 149-170, November. [Downloadable!] (restricted)
  10. Roger Craine & Arthur Havenner & Peter Tinsley, 1976. "Optiimal Macroeconomic Control Policies," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 2, pages 27-39 National Bureau of Economic Research, Inc. [Downloadable!]
  11. Amman, Hans M & Kendrick, David A, 1995. "Nonconvexities in Stochastic Control Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 455-75, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Springer, vol. 31(1), pages 21-43, February. [Downloadable!] (restricted)
  2. P. Ruben Mercado, 2001. "The Timing of Uncertainty and The Intensity of Policy," Computing in Economics and Finance 2001 55, Society for Computational Economics.
  3. P. Mercado & David Kendrick, 2006. "Parameter Uncertainty and Policy Intensity: Some Extensions and Suggestions for Further Work," Computational Economics, Springer, vol. 27(4), pages 483-496, June. [Downloadable!] (restricted)
  4. Pedro Francisco Páez, 2005. "Are the Washington Consensus Policies Sustainable? Game Theoretical Assessment for the Case of Ecuador," Working Paper Series, Department of Economics, University of Utah 2005_07, University of Utah, Department of Economics. [Downloadable!]
  5. David Kendrick & Hans Amman, 2006. "A Classification System for Economic Stochastic Control Models," Computational Economics, Springer, vol. 27(4), pages 453-481, June. [Downloadable!] (restricted)
    Other versions:
  6. David A. Kendrick & Hans M. Amman & Marco P. Tucci, 2008. "Learning About Learning in Dynamic Economic Models," Working Papers 08-20, Utrecht School of Economics. [Downloadable!]
  7. 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. [Downloadable!]
    Other versions:
  8. Fidel Gonzalez, 2008. "Optimal Policy Response with Control Parameter and Intercept Covariance," Computational Economics, Springer, vol. 31(1), pages 1-20, February. [Downloadable!] (restricted)
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