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The Implementation of Stabilization Policy
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The Implementation of Stabilization Policy

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  • Olivier Loisel

    (CREST)

Abstract

In a broad class of locally linearizable dynamic stochastic rational-expectations models, I consider various alternative observation sets for the policy maker, each of them made of the history of some endogenous variables or exogenous shocks until some current or past date. For each observation set, I characterize, within the set of feasible paths (paths that can be obtained as one local equilibrium under a policy-instrument rule consistent with this observation set), the subset of implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under such a rule). In two applications, I show that, for relevant observation sets, optimal feasible monetary policy may not be implementable in the basic New Keynesian model, even when the number of observed variables largely exceeds the number of unobserved shocks; while debt-stabilizing feasible tax policy is, contrary to conventional wisdom, implementable in the standard real-business-cycle model, even in the presence of policy-implementation lags of any length.

Suggested Citation

  • Olivier Loisel, 2016. "The Implementation of Stabilization Policy," 2016 Meeting Papers 16, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:16
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    Cited by:

    1. Loisel, Olivier, 2021. "The implementation of stabilization policy," Theoretical Economics, Econometric Society, vol. 16(2), May.
    2. George-Marios Angeletos & Chen Lian, 2021. "Determinacy without the Taylor Principle," NBER Working Papers 28881, National Bureau of Economic Research, Inc.
    3. Loisel, Olivier, 2024. "Stabilization policy and lags," Journal of Mathematical Economics, Elsevier, vol. 111(C).

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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