Model uncertainty, robust policies, and the value of commitment
Using results from the literature on H-control, this paper incorporates model uncertainty into Whiteman's (1986) frequency domain approach to stabilization policy. The derived policies guarantee a minimum performance level even in the worst of (a bounded set of) circumstances. ; For a given level of model uncertainty, robust H- policies are shown to be more 'activist' than Whiteman's H- policies in the sense that their impulse responses are larger. Robust policies also tend to be more autocorrelated. Consequently, the premium associated with being able to commit is greater under model uncertainty. Without commitment, the policymaker isn't able to (credibly) smooth his response to the degree that he would like. ; From a technical standpoint, a contribution of this paper is its analysis of robust control in a model featuring a forward-looking state transition equation, which arises from the fact that the private sector bases its decisions on expectations of future government policy. Existing applications of H- control in economics follow the engineering literature, and only consider backward-looking state transition equations. It is the forward-looking nature of the state transition equation that makes a frequency domain approach attractive.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kasa, Kenneth, 1998.
"Optimal policy with limited commitment,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(6), pages 887-910, June.
- McCallum, Bennett T, 1995.
"Two Fallacies Concerning Central-Bank Independence,"
American Economic Review,
American Economic Association, vol. 85(2), pages 207-11, May.
- Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
- Lars Peter Hansen & Thomas J. Sargent, 1979.
"Formulating and estimating dynamic linear rational expectations models,"
127, Federal Reserve Bank of Minneapolis.
- Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Taylor, John B, 1975. "Monetary Policy during a Transition to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1009-21, October.
- V.V. Chari & Patrick J. Kehoe, 1989.
122, Federal Reserve Bank of Minneapolis.
- Mark Salmon & Massimiliano Marcellino, 2001.
"Robust Decision Theory and the Lucas Critique,"
wp01-10, Warwick Business School, Finance Group.
- William Roberds, 1986.
"Models of policy under stochastic replanning,"
104, Federal Reserve Bank of Minneapolis.
- Chari, V V & Kehoe, Patrick J, 1993.
"Sustainable Plans and Mutual Default,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 175-95, January.
- Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
- Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
- Oliner, Stephen D. & Rudebusch, Glenn D. & Sichel, Daniel, 1996. "The Lucas critique revisited assessing the stability of empirical Euler equations for investment," Journal of Econometrics, Elsevier, vol. 70(1), pages 291-316, January.
When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:99-14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)
If references are entirely missing, you can add them using this form.