The Timing of Uncertainty and The Intensity of Policy

No 55, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: This article analyzes the trade-off between ÏcautionÓ and ÏintensityÓ in the use of the control variable in a one-state one-control dynamic stochastic quadratic linear optimization problem with discount factor. It studies the effects that changes in uncertainty of the control parameter have on the optimal first-period response of the control variable, showing that the trade-off between ÏcautionÓ and ÏintensityÓ depends on the timing of the uncertainty. Given an increase in current uncertainty and an equal increase in future uncertainty, caution will always prevail over intensity. Moreover, the prevalence of caution will be enlarged as the increase in future uncertainty moves farther away into the future, while this prevalence will be reduced as the increase in future uncertainty expands into the future.

Keywords: Policy Uncertainty; Stochastic Control; Macroeconomic Policy (search for similar items in EconPapers)
JEL-codes: C44 C61 E52 (search for similar items in EconPapers)
Date: 2001-04-01
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Citations: View citations in EconPapers (2)

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Journal Article: The Timing of Uncertainty and the Intensity of Policy (2004)
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