ISSN:
1572-9974
Keywords:
Economic Policy
;
Uncertainty
;
C61
;
E61
Source:
Springer Online Journal Archives 1860-2000
Topics:
Computer Science
,
Economics
Notes:
Abstract This paper examines how considerations of model uncertainty can affect policy design. Without such considerations one may expect that choice of policy control rules for a macroeconomic model would depend on some welfare criterion based on the model as given. However if there is uncertainty in the structure of the model or in the values of particular model parameters then it is argued that choice of policy should take this into account. We introduce and define some measures ofrobustness which describe how well a particular control rule performs when the model is uncertain. These can only be evaluated using Monte-Carlo simulations; in that sense they are ‘ex post’. Then we define a number of indicators which may be of use in predicting robustness, and which do not require simulations to calculate. In that sense they are ‘ex ante’. Lastly we evaluate the ‘ex ante’ indicators on a small macromodel by comparing their predictions with the actual robustness outturn for the range of possible control rules. We find that use of the indicators in choosing rules yields some improvement on the ordinary welfare criterion, especially when the shocks hitting the system are unknown.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF01299176
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