Partial Adjustment as Optimal Response in a Dynamic Brainard Model

Abstract

Uncertainty about the precise quantitative effect of policy is endemic in economics. In a classic paper, Brainard showed that in the face of model of multiplier uncertainty optimal policy is relatively conservative. I extend this work to a dynamic model and show in general that gradual adjustment is optimal and in the most simple case derive the classic partial adjustment model as the optimal response to shocks.

JEL Classification: C5, E0