Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-23T05:59:16.784Z Has data issue: false hasContentIssue false

MODEL UNCERTAINTY, ROBUST POLICIES, AND THE VALUE OF COMMITMENT

Published online by Cambridge University Press:  15 May 2002

Kenneth Kasa
Affiliation:
Simon Fraser University

Abstract

Using results from the literature on H control, this paper incorporates model uncertainty into a frequency-domain approach to stabilization policy. The derived policies guarantee a minimum performance level even in the worst of (a bounded set of) circumstances. Robust H policies are shown to be more “activist” than H2 policies in the sense that their impulse responses are larger. Robust policies also tend to be more autocorrelated. Consequently, the premium associated with being able to commit is greater under model uncertainty. Without commitment, the policymaker is not able to (credibly) smooth his response to the degree that he would like. A contribution of this paper is its analysis of robust control in a model featuring a forward-looking state transition equation, which arises from the fact that the private sector bases its decisions on expectations of future government policy. Existing applications of H control in economics follow the engineering literature, and only consider backward-looking state transition equations.

Type
Research Article
Copyright
© 2002 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)