Polito, Vito and Spencer, Peter orcid.org/0000-0002-5595-5360 (2016) The Optimal Control of Heteroscedastic Macroeconomic Models. Journal of Applied Econometrics. 1430–1444. ISSN 0883-7252
Abstract
This paper analyses the implications of heteroscedasticity for optimal macroeconomic policy and welfare. We find that changes in the variance structure driven by exogenous processes like generalized autoregressive conditional heteroscedasticity (GARCH) affect welfare but not the optimal feedback rule. However, changes in the variance structure driven by state-dependent processes affect both. We also derive certainty-equivalent transformations of state-dependent volatility models that allow standard quadratic dynamic programming algorithms to be employed to study optimal policy. These results are illustrated numerically using a reduced-form model of the US economy in which changes in volatility are driven by a GARCH process and the rate of inflation. Copyright © 2015 John Wiley & Sons, Ltd.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © John Wiley and Sons 2015. This is an author produced version of a paper published in Journal of Applied Econometrics. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Heteroscedasticity GARCH optimal control |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > Economics and Related Studies (York) |
Depositing User: | Pure (York) |
Date Deposited: | 12 Jan 2016 11:13 |
Last Modified: | 16 Oct 2024 12:44 |
Published Version: | https://doi.org/10.1002/jae.2488 |
Status: | Published |
Refereed: | Yes |
Identification Number: | 10.1002/jae.2488 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:93507 |