Working Paper: NBER ID: w1225
Authors: John B. Taylor
Abstract: This paper considers the problem of calculating optimal policy rules to stabilize fluctuations in investment in an economy where firms' investment behavior can be described by a dynamic optimization model. In the optimization model, the dynamics of investment are generated by heterogeneous gestation lags between the start and completion of capital projects, rather than by adjustment costs in the installation of capital. A procedure is derived for calculating policy rules for an arbitrary autoregressive process generating fluctuations in firms sales. Through stochastic simulation we investigate the effects of using certain suboptimal policy rules in cases where there are constraints against using the optimal rules.
Keywords: Investment; Policy Rules; Stochastic Models
JEL Codes: E32; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost variable (c) (D24) | investment fluctuations (G31) |
| expected future sales (y) (G17) | investment decisions (G11) |
| suboptimal policies (D78) | increased instability in investment (E22) |
| cost variable (c) (D24) | disturbances in investment caused by expected future sales (y) (E22) |