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The Timing of Uncertainty and The Intensity of Policy

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  • P. Ruben Mercado
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    Abstract

    This article analyzes the trade-off between ÏcautionÓ and ÏintensityÓ in the use of the control variable in a one-state one-control dynamic stochastic quadratic linear optimization problem with discount factor. It studies the effects that changes in uncertainty of the control parameter have on the optimal first-period response of the control variable, showing that the trade-off between ÏcautionÓ and ÏintensityÓ depends on the timing of the uncertainty. Given an increase in current uncertainty and an equal increase in future uncertainty, caution will always prevail over intensity. Moreover, the prevalence of caution will be enlarged as the increase in future uncertainty moves farther away into the future, while this prevalence will be reduced as the increase in future uncertainty expands into the future.

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 55.

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    Date of creation: 01 Apr 2001
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    Handle: RePEc:sce:scecf1:55

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    Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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    Related research

    Keywords: Policy Uncertainty; Stochastic Control; Macroeconomic Policy;

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    References

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    1. Wieland, Volker, 2003. "Monetary Policy and Uncertainty about the Natural Unemployment Rate," CFS Working Paper Series 2003/05, Center for Financial Studies (CFS).
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Hans M. Amman & David A. Kendrick, 1997. "Should Macroeconomic Policy Makers Consider Parameter Covariances?," CARE Working Papers 9701, The University of Texas at Austin, Center for Applied Research in Economics.
    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. 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.
    6. 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.
    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.
    8. Sack, Brian, 2000. "Does the fed act gradually? A VAR analysis," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 229-256, August.
    9. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
    10. Shupp, Franklin R., 1976. "Uncertainty and optimal stabilization policy," Journal of Public Economics, Elsevier, vol. 6(3), pages 243-253, October.
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    Cited by:
    1. Kendrick, David A., 2005. "Stochastic control for economic models: past, present and the paths ahead," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 3-30, January.
    2. Arnulfo Rodriguez, 2004. "Robust Control: A Note on the Timing of Model Uncertainty," Computing in Economics and Finance 2004 147, Society for Computational Economics.

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