Elements of a Theory of Design Limits to Optimal Policy

29 Pages Posted: 28 May 2004 Last revised: 6 Sep 2010

See all articles by William A. Brock

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Steven N. Durlauf

University of Chicago; National Bureau of Economic Research (NBER)

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Date Written: May 2004

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.

Suggested Citation

Brock, William A. and Durlauf, Steven N., Elements of a Theory of Design Limits to Optimal Policy (May 2004). NBER Working Paper No. w10495. Available at SSRN: https://ssrn.com/abstract=546292

William A. Brock

University of Wisconsin, Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6655 (Phone)
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University of Missouri at Columbia - Department of Economics ( email )

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Columbia, MO 65211
United States

Steven N. Durlauf (Contact Author)

University of Chicago ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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