Tales of Transition Paths: Policy Uncertainty and Random Walks

Josef Hollmayr and Christian Matthes

No 15-11, Working Paper from Federal Reserve Bank of Richmond

Abstract: What happens when fiscal and/or monetary policy changes systematically? We construct a DSGE model in which agents have to estimate fiscal and monetary policy rules and assess how uncertainty surrounding the conduct of policymakers influences transition paths after policy changes. We find that policy changes of the magnitude often considered in the literature can lead private agents to hold substantially different views about the nature of equilibrium than would be predicted by a full information analysis. In particular, random walk-like behavior can be observed for a large number of periods in equilibrium, even though the models we use admit stationary dynamics under full-information rational expectations.

JEL-codes: D83 E32 E62 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-10-23
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: Tales of transition paths: Policy uncertainty and random walks (2015)
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