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Optimal Fiscal Adjustment under Uncertainty

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  • Rossen Rozenov

Abstract

The paper offers a non-probabilistic framework for representation of uncertainty in the context of a simple linear-quadratic model of fiscal adjustment. Instead of treating model disturbances as random variables with known probability distributions, it is only assumed that they belong to some pre-specified compact set. Such an approach is appropriate when the decision maker does not have enough information to form probabilistic beliefs or when considerations for robustness are important. Solution of the model in the minimax sense when disturbance sets are ellipsoids is obtained and the application of the method is illustrated using the example of Portugal.

Suggested Citation

  • Rossen Rozenov, 2016. "Optimal Fiscal Adjustment under Uncertainty," IMF Working Papers 2016/069, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/069
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    References listed on IDEAS

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    6. Johanna Etner & Meglena Jeleva & Jean-Marc Tallon, 2009. "Decision theory under uncertainty," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00429573, HAL.
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