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Partial Adjustment As Optimal Response in a Dynamic Brainard Model

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Richard Startz

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Abstract

Uncertainty about the precise quantitative effect of policy is endemic in economics. In a classic paper, Brainard showed that in the face of multiplier uncertainty in a static model that optimal policy is relatively conservative. I extend this work to a dynamic model and show in general that gradual adjustment is optimal and in the most simple case derive the classic partial adjustment model as the optimal response to shocks.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2003-20.

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Date of creation: Oct 2003
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Handle: RePEc:udb:wpaper:uwec-2003-20

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  1. John Driffill & Zeno Rotondi, 2007. "Inertia in Taylor Rules," WEF Working Papers 0032, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
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