Working Paper: NBER ID: w14357
Authors: William A. Brock; Steven N. Durlauf; Giacomo Rondina
Abstract: 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.
Keywords: Monetary Policy; Stabilization Policies; Frequency Domain Analysis; Design Limits
JEL Codes: C6; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy regimes (E63) | volatility in inflation (E31) |
| monetary policy regimes (E63) | volatility in output (E39) |
| reducing variance at some frequencies (C32) | increased variance at others (D89) |
| Volcker regime (E65) | reduced inflation (E31) |
| Volcker regime (E65) | increased low-frequency output gap volatility (E32) |
| monetary policies aiming to stabilize certain metrics (E63) | inadvertently destabilize others (D59) |