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The implementation of stabilization policy

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  • Loisel, Olivier

    (CREST (ENSAE))

Abstract
In locally linearized dynamic stochastic rational-expectations models, I introduce the concepts of feasible paths (paths on which the policy instrument can be expressed as a function of the policymaker's observation set) and implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under a policy-instrument rule consistent with the policymaker's observation set). I show that, for relevant observation sets, the optimal feasible path under monetary policy can be non-implementable in the New Keynesian model, while constant-debt feasible paths under tax policy are always implementable in the Real Business Cycle model. The first result sounds a note of caution about one of the main lessons of the New Keynesian literature, namely the importance for central banks to track some key unobserved exogenous rates of interest, while the second one restores to some extent the role of income or labor-income taxes in safely stabilizing public debt. For any given implementable path, I show how to design arithmetically a policy-instrument rule consistent with the policymaker's observation set and implementing this path as the robustly unique local equilibrium.

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  • Loisel, Olivier, 2021. "The implementation of stabilization policy," Theoretical Economics, Econometric Society, vol. 16(2), May.
    • Handle: RePEc:the:publsh:3322
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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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    More about this item

    Keywords

    Stabilization policy; local-equilibrium determinacy; observation set; feasible path; implementable path; optimal monetary policy; debt-stabilizing tax policy;
    All these keywords.

    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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