U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods

Show full item record

Title: U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods
ISBN: 978-952-323-279-2
Author: Crowley, Patrick M. ; Hudgins, David
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 11/2019
Year of publication: 2019
Publication date: 10.7.2019
Pages: 49
Subject (yso): rahapolitiikka; finanssipolitiikka; tavoitteet; inflaatio; ekonometriset mallit; valuuttakurssit
Keywords: Yhdysvallat; inflaatiotavoite; rahan määrä; korot
JEL: C61; C63; C88; E52; E61; F47
Other keywords: Discrete Wavelet Analysis; Fiscal Policy; Monetary Policy; Optimal Control
Abstract: It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.
Rights: https://helda.helsinki.fi/bof/copyright


Files in this item

Total number of downloads: Loading...

Files Size Format View
BoF_DP_1911.pdf 914.3Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record