Policy with Stochastic Hysteresis

Job Boerma, Georgii Riabov and Aleh Tsyvinski
Additional contact information
Job Boerma: University of Wisconsin-Madison
Georgii Riabov: Institute of Mathematics of NAS of Ukraine
Aleh Tsyvinski: Yale University

No 2382, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper studies stochastic hysteresis - general dependence on the path of past decisions and shocks. We develop a new methodology for deriving the explicit dynamics of optimal policy with path- dependence and show that stochastic hysteresis changes optimal policy both qualitatively and quantitatively. We showcase our methodology by deriving new results for optimal policy with stochastic habits, tipping points, robustness concerns, limited commitment, and dynamic private information.

Pages: 69 pages
Date: 2023-08
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