Optimal Control Response to Multiplicative Uncertainty with a Constant Term
AbstractIn a one-state one-control variable Quadratic Linear Problem, I examine the effect of an increase in the multiplicative uncertainty on the use of the control variable. In contrast with previous studies, this model considers a stochastic constant term in the transition equation. I found that the optimal response depends on the covariance between the parameter with multiplicative uncertainty and the constant term. A nonnegative covariance produces a cautionary response following previous results. However, a negative covariance produces an aggressive response in the optimal control. Hence, previous studies represent a special case of this model. Numerical results are provided using global warming data
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 440.
Date of creation: 04 Jul 2006
Date of revision:
Stochastic Control; Policy Uncertainty;
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