Tales of Transition Paths: Policy Uncertainty and Random Walks

34 Pages Posted: 21 Jun 2016

See all articles by Josef Hollmayr

Josef Hollmayr

Goethe University Frankfurt

Christian Matthes

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: 2015

Abstract

What happens when fiscal and/or monetary policy changes systematically? We construct a DSGE model in which agents have to estimate fiscal and monetary policy rules and assess how uncertainty surrounding the conduct of policymakers influences transition paths after policy changes. We find that policy changes of the magnitude often considered in the literature can lead private agents to hold substantially different views about the nature of equilibrium than would be predicted by a full information analysis. In particular, random walk-like behavior can be observed for a large number of periods in equilibrium, even though the models we use admit stationary dynamics under full-information rational expectations.

Keywords: DSGE, Monetary-Fiscal Policy Interaction, Learning

JEL Classification: E32, D83, E62

Suggested Citation

Hollmayr, Josef and Matthes, Christian, Tales of Transition Paths: Policy Uncertainty and Random Walks (2015). Bundesbank Discussion Paper No. 14/2015. Available at SSRN: https://ssrn.com/abstract=2797039

Josef Hollmayr (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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