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Policy with Stochastic Hysteresis

Author

Listed:
  • Job Boerma

    (University of Wisconsin-Madison)

  • Georgii Riabov

    (Institute of Mathematics of NAS of Ukraine)

  • Aleh Tsyvinski

    (Yale University)

Abstract

This paper studies stochastic hysteresis - general dependence on the path of past decisions and shocks. We develop a new methodology for deriving the explicit dynamics of optimal policy with path- dependence and show that stochastic hysteresis changes optimal policy both qualitatively and quantitatively. We showcase our methodology by deriving new results for optimal policy with stochastic habits, tipping points, robustness concerns, limited commitment, and dynamic private information.

Suggested Citation

  • Job Boerma & Georgii Riabov & Aleh Tsyvinski, 2023. "Policy with Stochastic Hysteresis," Cowles Foundation Discussion Papers 2382, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2382
    as

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    File URL: https://cowles.yale.edu/sites/default/files/2024-02/d2382.pdf
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    References listed on IDEAS

    as
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    3. Borovicka, J. & Hansen, L.P., 2016. "Term Structure of Uncertainty in the Macroeconomy," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1641-1696, Elsevier.
    4. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    5. Detemple, Jerome B & Zapatero, Fernando, 1991. "Asset Prices in an Exchange Economy with Habit Formation," Econometrica, Econometric Society, vol. 59(6), pages 1633-1657, November.
    6. Narayana Kocherlakota & Luigi Pistaferri, 2009. "Asset Pricing Implications of Pareto Optimality with Private Information," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 555-590, June.
    7. Raj Chetty & Nathaniel Hendren & Lawrence F. Katz, 2016. "The Effects of Exposure to Better Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment," American Economic Review, American Economic Association, vol. 106(4), pages 855-902, April.
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    Full references (including those not matched with items on IDEAS)

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