Optimal Fiscal Adjustment under Uncertainty

Rossen Rozenov

No 2016/069, IMF Working Papers from International Monetary Fund

Abstract: The paper offers a non-probabilistic framework for representation of uncertainty in the context of a simple linear-quadratic model of fiscal adjustment. Instead of treating model disturbances as random variables with known probability distributions, it is only assumed that they belong to some pre-specified compact set. Such an approach is appropriate when the decision maker does not have enough information to form probabilistic beliefs or when considerations for robustness are important. Solution of the model in the minimax sense when disturbance sets are ellipsoids is obtained and the application of the method is illustrated using the example of Portugal.

Keywords: WP; potential GDP; debt ratio; Fiscal consolidation; decisions theory; uncertainty; minimax; output gap shock; decision theory; utility function; growth rate; potential GDP trajectory; identity matrix; linear system; equivalent multiplier problem; debt sustainability concern; minimax criterion; Output gap; Fiscal stance; Fiscal multipliers; Global (search for similar items in EconPapers)
Pages: 51
Date: 2016-03-17
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