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Feedback and the Use of Current Information: The Use of General Linear Policy Rules in Rational Expectations Models

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  • Willem H. Buiter

Abstract

The behavior of several stochastic dynamic rational expectations models is studied when policy behavior can be described by a linear rule. Four policy components are distinguished: a current response component, a feedback component, an open-loop component and a stochastic component. Policy is evaluated in terms of the current and asymptotic first and second moments of the state variables. The importance of distinguishing between variability and uncertainty is brought out. The conditional variance is argued to be the appropriate measure of uncertainty. The analysis is applied to a model of foreign exchange market intervention.

Suggested Citation

  • Willem H. Buiter, 1979. "Feedback and the Use of Current Information: The Use of General Linear Policy Rules in Rational Expectations Models," NBER Working Papers 0335, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0335
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    1. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-172, March.
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    3. Geoffrey Woglom, 1979. "Rational Expectations and Monetary Policy in a Simple Macroeconomic Model," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 91-105.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. Black, Stanley W, 1976. " Comment on J. Williamson, "Exchange-Rate Flexibility and Reserve Use."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 340-345.
    6. Stephen F. LeRoy, 1975. "Efficient use of current information in short-run monetary control," Special Studies Papers 66, Board of Governors of the Federal Reserve System (U.S.).
    7. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 293-346.
    8. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
    9. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    10. Shiller, Robert J., 1978. "Rational expectations and the dynamic structure of macroeconomic models : A critical review," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 1-44, January.
    11. Masanao Aoki & Matthew Canzoneri, 1979. "Reduced Forms of Rational Expectations Models," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 59-71.
    12. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-1385, September.
    13. Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 29-50, February.
    14. Williamson, John, 1976. " Exchange-Rate Flexibility and Reserve Use," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 327-339.
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