Stabilization policy and lags

Olivier Loisel

Journal of Mathematical Economics, 2024, vol. 111, issue C

Abstract: Macroeconomic stabilization policy is notoriously subject to inside lags (which delay the reaction of policy to the state of the economy) and outside lags (which delay the effects of policy on the economy). In a broad class of dynamic rational-expectations models, I show that neither inside lags nor outside lags of any length restrict the ability of the policymaker to ensure local-equilibrium determinacy and to control the anticipation and convergence rates, under a weak condition on the model and the policymaker’s observation set. To establish this result, I invert the problem usually addressed in the literature: I start from a targeted characteristic polynomial, and I derive a corresponding policy-instrument rule. For any lags, this method offers some degrees of freedom that can be exploited to design rules with additional properties; I illustrate this possibility by designing non-superinertial rules, which the literature suggests may be more robust under model uncertainty.

Keywords: Stabilization policy; Inside and outside lags; Local-equilibrium determinacy; Anticipation rates; Convergence rates; Non-superinertial rules (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:111:y:2024:i:c:s030440682400003x

DOI: 10.1016/j.jmateco.2024.102941

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