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Should Macroeconomic Policy Makers Consider Parameter Covariances?

  • Hans M. Amman

    ()

    (Eco, U. of Amsterdam)

  • David A. Kendrick

    ()

    (Eco, U. of Texas)

Many macroeconomic policy exercises consider the mean values of parameter estimates but do not use the variances and covariances. One can argue that the uncertainty of these parameter estimates is sufficiently small that it can safely be ignored. Or one can take the position that this kind of uncertainty cannot be avoided no matter what one does. Thus it is just as well to ignore it while making policy decisions. In this paper we address both of these positions in the presence of learning and find that they are unconvincing. To the contrary, we find evidence that the potential damage from ignoring the variances and covariances of the parameter estimates is substantial and that taking them into account can improve matters. Citation Copyright 1999 by Kluwer Academic Publishers.

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Paper provided by The University of Texas at Austin, Center for Applied Research in Economics in its series CARE Working Papers with number 9701.

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Length: 11 pages
Date of creation: Feb 1997
Date of revision:
Handle: RePEc:tex:carewp:9701
Note: None
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  1. Pohjola, Matti T., 1981. "Uncertainty and the vigour of policy Some implications of quadratic preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 3(1), pages 299-305, November.
  2. Turnovsky, Stephen J, 1975. "Optimal Choice of Monetary Instrument in a Linear Economic Model with Stochastic Coefficients," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 7(1), pages 51-80, February.
  3. Kendrick, David, 1982. "Caution and probing in a macroeconomic model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 149-170, November.
  4. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
  5. Roger Craine & Arthur Havenner & Peter Tinsley, 1976. "Optimal Macroeconomic Control Policies," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 2, pages 191-203 National Bureau of Economic Research, Inc.
  6. Shupp, Franklin R., 1976. "Uncertainty and optimal stabilization policy," Journal of Public Economics, Elsevier, vol. 6(3), pages 243-253, October.
  7. Chow, Gregory C, 1973. "Effect of Uncertainty on Optimal Control Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 632-45, October.
  8. Ray C. Fair & E. Philip Howrey, 1995. "Evaluating Alternative Monetary Policy Rules," Cowles Foundation Discussion Papers 1091, Cowles Foundation for Research in Economics, Yale University.
  9. Amman, Hans M. & Kendrick, David A., 1994. "Active learning Monte Carlo results," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 119-124, January.
  10. Amman, Hans M & Kendrick, David A, 1995. "Nonconvexities in Stochastic Control Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 455-75, May.
  11. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September.
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