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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 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.

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    File URL: http://repec.org/sce2004/up.20013.1077774780.pdf
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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 147.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:147

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    Web page: http://comp-econ.org/
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    Keywords: optimal control; model uncertainty; robustness; macroeconomic policy;

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    1. S. Zakovic & V. Wieland & B. Rustem, 2004. "Stochastic Optimisation and Worst Case Analysis in Monetary Policy Design," Computing in Economics and Finance 2004 213, Society for Computational Economics.
    2. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    3. 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.
    4. Mercado, P. Ruben & Kendrick, David A., 2000. "Caution in macroeconomic policy: uncertainty and the relative intensity of policy," Economics Letters, Elsevier, vol. 68(1), pages 37-41, July.
    5. P. Ruben Mercado, 2001. "The Timing of Uncertainty and The Intensity of Policy," Computing in Economics and Finance 2001 55, Society for Computational Economics.
    6. 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.
    7. 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.
    8. 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.
    9. Arnulfo Rodriguez & Fidel Gonzalez, 2003. "Robust Control: A Note on the Response of the Control to Changes in the Free Parameter," Computing in Economics and Finance 2003 207, Society for Computational Economics.
    10. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
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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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