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Design Limits and Dynamic Policy Analysis

  • William A. Brock
  • Steven N. Durlauf
  • Giacomo Rondina

This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different policies affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce increases in variance at others. Tradeoffs of this type are known in the control literature as design limits. Design limits are important in understanding the full range of effects of macroeconomic stabilization policies. We extend existing results to account for discrete time bivariate systems with rational expectations. Application is made to the evaluation of monetary policy rules.

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File URL: http://www.nber.org/papers/w14357.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14357.

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Date of creation: Sep 2008
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Publication status: published as Brock, William A. & Durlauf, Steven N. & Rondina, Giacomo, 2013. "Design limits and dynamic policy analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2710-2728.
Handle: RePEc:nbr:nberwo:14357
Note: EFG ME
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  10. Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
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  18. Onatski, Alexei, 2006. "Winding number criterion for existence and uniqueness of equilibrium in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 323-345, February.
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  21. Otrok, C. & Ravikumar, B. & Whiteman, C., 1998. "Habit Formation: A Resolution of the Equity Premium Puzzle?," Working Papers 98-04, University of Iowa, Department of Economics.
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  25. Lars Peter Hansen & Thomas J. Sargent, 2007. "Introduction to Robustness," Introductory Chapters, Princeton University Press.
  26. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
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