The implementation of stabilization policy

Olivier Loisel

Theoretical Economics, 2021, vol. 16, issue 2

Abstract: In locally linearized dynamic stochastic rational-expectations models, I introduce the concepts of feasible paths (paths on which the policy instrument can be expressed as a function of the policymaker's observation set) and implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under a policy-instrument rule consistent with the policymaker's observation set). I show that, for relevant observation sets, the optimal feasible path under monetary policy can be non-implementable in the New Keynesian model, while constant-debt feasible paths under tax policy are always implementable in the Real Business Cycle model. The first result sounds a note of caution about one of the main lessons of the New Keynesian literature, namely the importance for central banks to track some key unobserved exogenous rates of interest, while the second one restores to some extent the role of income or labor-income taxes in safely stabilizing public debt. For any given implementable path, I show how to design arithmetically a policy-instrument rule consistent with the policymaker's observation set and implementing this path as the robustly unique local equilibrium.

Keywords: Stabilization policy; local-equilibrium determinacy; observation set; feasible path; implementable path; optimal monetary policy; debt-stabilizing tax policy (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2021-05-03
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20210677/30647/884 (application/pdf)

Related works:
Working Paper: The Implementation of Stabilization Policy (2016)
Working Paper: The Implementation of Stabilization Policy (2015)
Working Paper: The Implementation of Stabilization Policy (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:3322

Access Statistics for this article

Theoretical Economics is currently edited by Simon Board, Todd D. Sarver, Juuso Toikka, Rakesh Vohra, Pierre-Olivier Weill

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().