The Implementation of Stabilization Policy

Olivier Loisel

Working papers from Banque de France

Abstract: In a broad class of locally linearizable dynamic stochastic rational-expectations models, I consider various alternative observation sets for the policy maker, each of them made of the history of some endogenous variables or exogenous shocks until some current or past date. For each observation set, I characterize, within the set of feasible paths (paths that can be obtained as one local equilibrium under a policy-instrument rule consistent with this observation set), the subset of implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under such a rule). In two applications, I show that, for relevant observation sets, optimal feasible monetary policy may not be implementable in the basic New Keynesian model, even when the number of observed variables largely exceeds the number of unobserved shocks; while debt-stabilizing feasible tax policy is, contrary to conventional wisdom, implementable in the standard real-business-cycle model, even in the presence of policy-implementation lags of any length.

Keywords: stabilization policy; robust local-equilibrium determinacy; observation set; feasible path; implementable path. (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: The implementation of stabilization policy (2021)
Working Paper: The Implementation of Stabilization Policy (2016)
Working Paper: The Implementation of Stabilization Policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:556

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