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3 edition of Optimal stabilization policy in the context of a linearized model with endogenous timehorizon. found in the catalog.

Optimal stabilization policy in the context of a linearized model with endogenous timehorizon.

Benjamin M. Friedman

Optimal stabilization policy in the context of a linearized model with endogenous timehorizon.

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Published by Harvard Institute of Econimic Research in Cambridge (Mass.) .
Written in English


Edition Notes

SeriesDiscussion paper / Harvard Institute of Economic Research -- No.159
ID Numbers
Open LibraryOL17174406M

This is a linear model for the mean of log Y which may not always be appropriate. E.g. if Y is income perhaps we are really interested in the mean income of population subgroups, in which case it would be better to model E (Y) using a glm: log E (Y i) = 0 + 1 x 1 with V .   Stabilization policy is a government strategy intended to encourage steady economic growth, even price levels, and optimal employment numbers. An Exploration of Optimal Stabilization Policy by N. Gregory Mankiw and Matthew C. Weinzierl The researchers explore alternative policy responses to a recession caused by a decline in aggregate demand, the situation affecting the global economy over the last several years. This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and.


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Optimal stabilization policy in the context of a linearized model with endogenous timehorizon. by Benjamin M. Friedman Download PDF EPUB FB2

Optimal policy responses in models in which the economy is in a sudden stop.1 In this paper we address the complementary issue of optimal stabilization policy for an economy that might be subject to a sudden stop.

Our model can in principle provide direction on how. In the optimal policy analysis, we focus on a tax wedge on non-tradable consumption, with a balanced budget rule by lump sum transfers. We first compute the optimal policy and then compare it to alternative simple, non-contingent tax rules.

One important result of the analysis is that the optimal stabilization policy is highly non-linear. CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): We study optimal stabilization policy in a simple two-good production economy with an occasionally binding credit constraint as in Mendoza ().

In the model, the policy instrument of the government is Optimal stabilization policy in the context of a linearized model with endogenous timehorizon. book distortionary tax wedge on consumption of non-tradable goods with a balanced budget rule by lump sum transfers. The usual disclaimer applies.

We study optimal stabilization policy in a simple two-good production economy with an occasionally binding credit constraint as in Mendoza ().

In the model, the policy instrument of the government is a distortionary tax wedge on consumption of non-tradable goods with a balanced budget rule by lump sum transfers. Optimal Stabilization Policy with Endogenous Firm Entry Aleksander Berentsen University of Basel Christopher Waller University of Notre Dame FRB-St.

Louis Janu Abstract We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and –rm entry is endogenous.

This paper considers the role of optimal fiscal policy in the context of a macrodynamic model of the open economy. The dynamics of the model are gover.

REFERENCES BENJAMIN M. FRIEDMAN, Optimal Stabilization Policy in the Context of a Linearized Model Endogenous Time Horizon, Harvard Institute of Economic Research Discussion Paper, Harvard University ().

CHARNES and W. COOPER, Management Models and Industrial Applications of Linear Programming. John Wiley (). Euler – Lagrangian method is linearized around the equilibrium point i.e. upright position such that. The linearized model is written in the state space form as (6) (7) Where, and.

The state space model of the system is thus obtained as (8) Linearization is done at the equilibrium point and the state. which the analysis of optimal monetary stabilization policy can or should be extended. 1 Optimal Policy in a Canonical New Keynesian Model In this section, I illustrate a number of fundamental insights from the literature on the optimal conduct of monetary policy, in the context of a simple but extremely influential example.

The linearized model above is only valid in a small neighborhood of the equilibrium x∗ = [π 0]⊤, that is, it is only valid when the components ∆x1 and ∆x2 of the vector ∆x, are small.

Physically this can be rephrased as follows: the linearized model of the pendulum at the vertical upward. scal stabilization policies. This paper uses a closed agent-based macroeconomic model that generates endogenous business cycles to emphasize the role of the policy design for long-term growth e ects of stabilization policies.

By comparing a demand-oriented con-sumption policy and two di erent investment subsidizing policies, we can show that the. Motivation: Solow’s growth model Most modern dynamic models of macroeconomics build on the framework described in Solow’s () paper.1 To motivate what is to follow, we start with a brief description of the Solow model.

This model was set up to study a closed economy, and we will assume that there is a constant population. The model. Monetary policy has signi–cant but overlooked e⁄ects on entry and exit of –rms.

We study optimal monetary stabilization policy in a DSGE model with microfounded money demand and endogenous –rm entry. Due to a congestion externality a⁄ecting –rm entry, the optimal policy deviates from the Friedman rule in all states even though.

The article proposes a new nonlinear optimal control method for the stabilization of the business cycles of interconnected finance agents. First, the dynamics of the interacting finance agents and of the associated business cycles is described by a model of coupled nonlinear oscillators.

Next, this dynamic model undergoes approximate linearization round a temporary operating point which is. Ester Faia's 68 research works with 1, citations and 2, reads, including: Trust in the Monetary Authority.

This paper demonstrates how fiscal policy rules can be designed to eliminate all forms of endogenous fluctuations in a one-sector growth model with increasing returns-to-scale. several optimal stabilization policies using a 2-state variable (tenequations) quarterly econometric model [7].

The optimal policies were based on different cost functions (i.e. different Q and R matrices) designed to provide insight into the trade-oITh inherent in policy formulation in the context of the model. of the considered scal stabilization policies. This paper uses a closed agent-based macroeconomic model that generates endogenous business cycles to emphasize the role of the policy design for long-term growth e ects of stabilization policies.

By comparing a demand-oriented consumption policy and two di erent investment subsidizing poli. a model that may otherwise be intractable. To see the degree of simpli fication, take as an example the equation y t = sz tk α t.

Log-linearization converts it into the form ey t = ez t +αek t, where the log-deviations from the steady state are identi fied with a tilde above the variable. Second, the time horizon of the optimization becomes, within the context of economic stabilization problems, endogenous to the optimization process itself.

The purpose of both extensions is to escape the conceptual restrictiveness of the Tinbergen-Theil structure while preserving the practical convenience of that model for applied policy work. As the numerous examples show, they are useful both for model building and for devising optimal institutions.

The Theory of Economic Policy in a Strategic Context is an essential but accessible tool for economic researchers involved in policy questions. Consideration is given to the problem of stabilization of a specified (supporting) mode as a degenerate problem of minimization of the root-mean-square deviation from it where there are no deviations of control actions.

This formulation makes it possible to completely use available limited control resources for stabilization. We propose a method of approximate optimal synthesis in the. Abstract: We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency.

Quantifying Optimal Policy in an Endogenous Growth Model: A Theoretical Analysis In Arnold (b) studies the optimal combination of production and R&D subsidies in the Romer () model.

This model has been criticised because of the implied counterfactual scale effects and, furthermore, it does not include duplication externalities. Downloadable. Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy.

The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies.

policy does not by itself give traditional fiscal policy a role as a stabilization tool. Instead, the optimal policy is for the central bank to commit to future monetary policy actions in order to increase current aggregate demand. Fiscal policy continues to be set on classical principles.

Downloadable. We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation.

We show that policy rules that let the GNP share of government spending sufficiently negatively on increases in GNP. This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand.

The theoretical framework is a two-period general equilibrium model in which prices are. By "solving" a model, we mean solving for the values of the endogenous variables given values for the exogenous variables.

Remember that exogenous variables are not explained within the model. Say that we are in period t-1 and we want to use the model to forecast consumption, investment, and income for.

Government economic policy - Government economic policy - Stabilization theory: The new stabilization policy needed a theoretical rationale if it was ever to win general acceptance from the leaders of public opinion.

The main credit for providing this belongs to Keynes. In his General Theory of Employment, Interest and Money (–36) he endeavoured to show that a capitalist economy with its.

3 Optimal Fiscal Policy when Monetary Policy is Restricted (Sec-tion 6 of the paper) First, we consider only government purchases. Then we turn to the investment subsidy Government purchases (Section of the paper) Expression (38) from the paper is the monetary policy position that generates full employment in the sticky-price model.

The starting point of our analysis is an endogenous growth model in which the rate of time preference depends positively on the economy‐wide consumption level and negatively on the publicly provided aggregate human capital stock, which are exogenous to the agents' decisions, and we introduce in this setup optimal fiscal policy in the form of.

Assets are coupled to endogenous aggregate output fluctuations in a model of heterogeneous agents. Those agents wish to avoid reacting inadvertently to an unobservable noise process, but to do so must elicit reactions to that noise from each other.

An abstract institution is modeled that optimizes this elicitation by strategically transmitting information about aggregates; I designate this. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry.

The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks.

the formulation of the stabilization policy under the assumption that the economic system is controllable. The dynamic optimal control method of Mur at a () is utilized to derive the optimal money supply rule in our stochastic discrete-time macroeconomic model.

The features and merits of the method are that (1) the setting of the optimal con­. JUST AS EVERYBODY TALKS ABOUT the weather, every economist talks about endogenous stabilization policy, but nobody ever does anything about it. Chapter Stabilization Policy CHAPTER 15 Stabilization Policy 0 Question 1: Should policy be active or passive.

CHAPTER 15 Stabilization Policy 1 Growth rate of U.S. real GDP 4 6 8 Percent 10 change from 4 quarters earlier Average 0 2 growth rate Increase in unemployment during recessions. Analysis of these questions has required careful consideration of the conditions under which a linear-quadratic (LQ) stabilization policy problem (minimization of a quadratic loss function subject to constraints that represent the log-linearized structural relations of a DSGE model) yields a correct local approximation to optimal policy in the.

Examples of studies that use learning in energy and global warming models are T. Barker, H. Pan, J. Köhler, R. Warren, and S. Winne, “Decarbonizing the Global Economy with Induced Technological Change: Scenarios to using E3MG,” The Energy Journal Special Issue, Endogenous Technological Change and the Economics of Atmospheric.

Get this from a library. An exploration of optimal stabilization policy. [N Gregory Mankiw; Matthew Weinzierl; National Bureau of Economic Research.] -- This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky.

This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY/Q1-FY/Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization.

Outcomes of monetary and fiscal authority commitment to policy .Get this from a library! Optimal monetary stabilization policy. [Michael Woodford; National Bureau of Economic Research.] -- This paper reviews the theory of optimal monetary stabilization policy, with an emphasis on developments since the publication of Woodford ().

The structure of optimal policy commitments is.Stabilization Policy. 4. Arguments for active policy Recessions cause economic hardship for millions of people. The Employment Act of “It is the continuing policy and responsibility of the Federal Government to promote full employment and production.” The model of aggregate demand and supply (Chaps.

) shows how fiscal and monetary.