Optimal Stabilization Policy When the Private Sector Has Information Processing Constraints
This paper considers a linear-quadratic control problem and determines how optimal policy is affected when the private sector has finite (Shannon) capacity to process information. Such capacity constraints prevent private agents from perfectly observing the state variables and the policy choices. The first result is that the control problem when including these constraints remains to be of a linear-quadratic form, which makes the problem technically tractable. The main difference to a standard problem are the costs associated with the use of the policy instrument, which are now endogenous. Depending on parameters these costs might be either higher or lower and lead to less or more aggressive optimal policies, respectively. If shocks show persistence and are heteroskedastic then the costs of using the policy instrument are non-constant and generate either sluggish or overshooting optimal policy reactions.
|Date of creation:||01 Apr 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Web page: http://www.csef.it/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:81. 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: (Lia Ambrosio)
If references are entirely missing, you can add them using this form.