Should Macroeconomic Policy Makers Consider Parameter Covariances? |
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Authors: | Hans M. Amman David A. Kendrick |
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Affiliation: | (1) Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands E-mail;(2) Department of Economics, University of Texas, Austin, Texas, 78712, U.S.A. E-mail |
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Abstract: | Many macroeconomic policy exercises consider the mean values of parameter estimates but do not use the variances and covariances. One can argue that the uncertainty of these parameter estimates is sufficiently small that it can safely be ignored. Or one can take the position that this kind of uncertainty cannot be avoided no matter what one does. Thus it is just as well to ignore it while making policy decisions. In this paper we address both of these positions in the presence of learning and find that they are unconvincing. To the contrary, we find evidence that the potential damage from ignoring the variances and covariances of the parameter estimates is substantial and that taking them into account can improve matters. |
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Keywords: | macroeconomics learning stochastic optimization numerical experiments |
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