Elements of a Theory of Design Limits to Optimal Policy

William Brock and Steven Durlauf

No 10495, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a framework for understanding the limits that exist in optimal policy design in dynamic contexts. We consider the design of policies in the context of dynamic linear models. Fundamental design limits exist for policy rules in such environments in the sense that any policy rule embodies tradeoffs between the magnitudes of different frequency-specific components of the variance. Hence policies that are effective in eliminating low frequency variance components of a state variable can only do so at the cost of exacerbating high frequency variance components, and vice versa. Examples of the implications of such tradeoffs are considered.

JEL-codes: C52 E6 (search for similar items in EconPapers)
Date: 2004-05
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as William A. Brock & Steven N. Durlauf, 2004. "Elements of a Theory of Design Limits to Optimal Policy," Manchester School, University of Manchester, vol. 72(s1), pages 1-18, 09.

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Journal Article: Elements of a Theory of Design Limits to Optimal Policy (2004)
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