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The Implementation of Stabilization Policy

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  • O. Loisel

Abstract

In a broad class of locally linearizable dynamic stochastic rational-expectations models, I consider various alternative observation sets for the policy maker, each of them made of the history of some endogenous variables or exogenous shocks until some current or past date. For each observation set, I characterize, within the set of feasible paths (paths that can be obtained as one local equilibrium under a policy-instrument rule consistent with this observation set), the subset of implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under such a rule). In two applications, I show that, for relevant observation sets, optimal feasible monetary policy may not be implementable in the basic New Keynesian model, even when the number of observed variables largely exceeds the number of unobserved shocks; while debt-stabilizing feasible tax policy is, contrary to conventional wisdom, implementable in the standard real-business-cycle model, even in the presence of policy-implementation lags of any length.

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  • O. Loisel, 2015. "The Implementation of Stabilization Policy," Working papers 556, Banque de France.
  • Handle: RePEc:bfr:banfra:556
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    Cited by:

    1. Olivier Loisel, 2013. "The Implementation of Stabilization Policy," Working Papers 2013-24, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    stabilization policy; robust local-equilibrium determinacy; observation set; feasible path; implementable path.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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