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Robust Control: A Note on the Timing of Model Uncertainty

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  • Arnulfo Rodriguez

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    Abstract

    In this note a one-state, one-control variable quadratic linear problem with robust control and discount factor is developed to examine the optimal response of the first-period control to changes in future model uncertainty. A change in future model uncertainty has an effect on the optimal first-period control response going in the same direction as the one caused by an equal size change in current model uncertainty. However, both analytical and numerical results show that such effect is much lower than the one derived from a change in current model uncertainty. Moreover, such effect is even much lower as the change in model uncertainty moves farther away into the future. Finally, the infinite horizon result confirms the reinforcing nature of the effects on the optimal first-period control response of current and future changes in model uncertainty. Copyright Kluwer Academic Publishers 2004

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    File URL: http://hdl.handle.net/10.1007/s10614-004-3695-9
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    Bibliographic Info

    Article provided by Society for Computational Economics in its journal Computational Economics.

    Volume (Year): 24 (2004)
    Issue (Month): 3 (July)
    Pages: 209-221

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    Handle: RePEc:kap:compec:v:24:y:2004:i:3:p:209-221

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    Web page: http://www.springerlink.com/link.asp?id=100248
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    Related research

    Keywords: macroeconomic policy; model uncertainty; optimal control; robustness;

    References

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    1. Rustem, Berc & Wieland, Volker & Zakovic, Stan, 2005. "Stochastic optimization and worst-case analysis in monetary policy design," CFS Working Paper Series 2005/14, Center for Financial Studies (CFS).
    2. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June.
    3. Lars Peter Hansen & Thomas J. Sargent & Thomas D. Tallarini Jr., 1997. "Robust Permanent Income and Pricing," Levine's Working Paper Archive 596, David K. Levine.
    4. Hans M. Amman & David A. Kendrick, 1996. "The DUALI/DUALPC Software for Optimal Control Models: Introduction," CARE Working Papers 9602, The University of Texas at Austin, Center for Applied Research in Economics.
    5. Gonzalez, Fidel & Rodriguez, Arnulfo, 2005. "Robust control: A note on the response of the control to changes in the "free" parameter," Economics Letters, Elsevier, vol. 89(3), pages 294-299, December.
    6. Arnulfo Rodriguez & Fidel Gonzalez, 2004. "Robust Control: A Note on the Response of the Control to Changes in the," Computing in Economics and Finance 2004 114, Society for Computational Economics.
    7. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1, March Cit.
    8. Hans M. Amman & David A. Kendrick, 2003. "A Classification System for Economic Stochastic Control Models," Computing in Economics and Finance 2003 114, Society for Computational Economics.
    9. 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.
    10. P. Ruben Mercado, 2004. "The Timing of Uncertainty and the Intensity of Policy," Computational Economics, Society for Computational Economics, vol. 23(4), pages 303-313, 06.
    11. Hans M. Amman & David A. Kendrick & Heinz Neudecker, 1994. "Numerical Steady State Solutions for Nonlinear Dynamic Optimization Models," CARE Working Papers 9503, The University of Texas at Austin, Center for Applied Research in Economics.
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    Cited by:
    1. Fidel Gonzalez, 2008. "Optimal Policy Response with Control Parameter and Intercept Covariance," Computational Economics, Society for Computational Economics, vol. 31(1), pages 1-20, February.

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