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Optimal Fiscal Adjustment under Uncertainty

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  • Rossen Rozenov

Abstract

The paper offers a non-probabilistic framework for representation of uncertainty in the context of a simple linear-quadratic model of fiscal adjustment. Instead of treating model disturbances as random variables with known probability distributions, it is only assumed that they belong to some pre-specified compact set. Such an approach is appropriate when the decision maker does not have enough information to form probabilistic beliefs or when considerations for robustness are important. Solution of the model in the minimax sense when disturbance sets are ellipsoids is obtained and the application of the method is illustrated using the example of Portugal.

Suggested Citation

  • Rossen Rozenov, 2016. "Optimal Fiscal Adjustment under Uncertainty," IMF Working Papers 16/69, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:16/69
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    References listed on IDEAS

    as
    1. Johanna Etner & Meglena Jeleva & Jeanā€Marc Tallon, 2012. "Decision Theory Under Ambiguity," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 234-270, April.
    2. Reda Cherif & Fuad Hasanov, 2018. "Public debt dynamics: the effects of austerity, inflation, and growth shocks," Empirical Economics, Springer, vol. 54(3), pages 1087-1105, May.
    3. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    4. Carlo Zappia, 2014. "Non-Bayesian decision theory ahead of its time: the case of G. L. S. Shackle," Cambridge Journal of Economics, Oxford University Press, vol. 38(5), pages 1133-1154.
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    More about this item

    Keywords

    Fiscal adjustment; Fiscal consolidation; Fiscal policy; Econometric models; Fiscal consolidation; decisions theory; uncertainty; minimax;

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