Optimal Policy Response with Control Parameter and Intercept Covariance

Computational Economics, Vol. 31, No. 1, February 2008

Posted: 26 Aug 2008

See all articles by Fidel Gonzalez

Fidel Gonzalez

Sam Houston State University - College of Business Administration - Department of Economics and International Business

Date Written: February 2008

Abstract

Parameter uncertainty and the interaction between the uncertain parameters are important aspects of economic policy. In this work, I develop an analytical one-state variable, one-control variable model with two uncertain parameters (the control parameter and the intercept) and a nonzero covariance. I characterize the effect of changes in each of the covariance components on the optimal expected control variable. I found that the nature of the optimal policy maker's response depends on the specific changing component of the covariance, the sign of the correlation coefficient and the sign of the optimal expected control variable when the covariance is zero. I obtain the conditions under which the effect of the covariance is considerable. This work complements previous studies by providing a complete set of cases and conditions for an aggressive or cautionary optimal policy maker's response to changes in each covariance component. Finally, the importance of the analytical results is shown for the regulation of a stock pollutant leading to global warming.

Keywords: Stochastic control, Multiplicative disturbances, Parameter covariance, Optimal policy response

JEL Classification: C61, E61, Q5

Suggested Citation

Gonzalez, Fidel, Optimal Policy Response with Control Parameter and Intercept Covariance (February 2008). Computational Economics, Vol. 31, No. 1, February 2008. Available at SSRN: https://ssrn.com/abstract=1259255

Fidel Gonzalez (Contact Author)

Sam Houston State University - College of Business Administration - Department of Economics and International Business ( email )

Huntsville, TX 77341-2118
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
370
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information