Working Paper: NBER ID: w10495
Authors: William A. Brock; Steven N. Durlauf
Abstract: This paper presents a framework for understanding the limits that exist in optimal policy design in dynamic contexts. We consider the design of policies in the context of dynamic linear models. Fundamental design limits exist for policy rules in such environments in the sense that any policy rule embodies tradeoffs between the magnitudes of different frequency-specific components of the variance. Hence policies that are effective in eliminating low frequency variance components of a state variable can only do so at the cost of exacerbating high frequency variance components, and vice versa. Examples of the implications of such tradeoffs are considered.
Keywords: No keywords provided
JEL Codes: C52; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal policy design (E61) | tradeoffs between different frequency components of variance in state variables (C32) |
| policies effective at reducing low-frequency variance (C22) | increase high-frequency variance (C58) |
| policies effective at increasing high-frequency variance (C58) | reduce low-frequency variance (C32) |
| bode integral constraint (C69) | limits on minimizing variance contributions at all frequencies simultaneously (C32) |
| model uncertainty (D80) | interacts with design limits of policies (E61) |