Implementing optimal control in cointegrated I(1) structural VAR models

Francesca V. Monti

No 288, Working Paper Series from European Central Bank

Abstract: This paper examines the feasibility of implementing Linear Quadratic Gaussian (LQG) Control in structural co-integrated VAR models and sheds some light on the two major problems generated by such implementation. The first aspect to be taken into account is the effect of the presence of unit roots in the system on the policy-maker's ability to control it, partially or thoroughly. Different control techniques are proposed according to the extent to which the policy-maker can exercise his control on the overall dynamics of the economy, i.e. depending on whether he/she can stabilise the whole system, only part of it or none of it. The second issue involves the structural form of the model. It will be shown in this paper that, in general, a system's features will change when implementing a new control rule. In particular, a controlled system will generally not retain features that should be intrinsically invariant to policy changes (e.g., neutrality of money in the long-run). JEL Classification: C32, C61, E52

Keywords: cointegration; optimal control; policy invariance; VAR models (search for similar items in EconPapers)
Date: 2003-11
Note: 362373
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003288

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