Francesca V. Monti
- 11 November 2003
- WORKING PAPER SERIES - No. 288Details
- Abstract
- This paper examines the feasibility of implementing Linear Quadratic Gaussian (LQG) Control in structural co-integrated VAR models and sheds some light on the two major problems generated by such implementation. The first aspect to be taken into account is the effect of the presence of unit roots in the system on the policy-maker's ability to control it, partially or thoroughly. Different control techniques are proposed according to the extent to which the policy-maker can exercise his control on the overall dynamics of the economy, i.e. depending on whether he/she can stabilise the whole system, only part of it or none of it. The second issue involves the structural form of the model. It will be shown in this paper that, in general, a system's features will change when implementing a new control rule. In particular, a controlled system will generally not retain features that should be intrinsically invariant to policy changes (e.g., neutrality of money in the long-run).
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
C61 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Optimization Techniques, Programming Models, Dynamic Analysis
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy