Optimal Fiscal Adjustment under Uncertainty

March 17, 2016

Preview Citation

Format: Chicago

Rossen Rozenov. Optimal Fiscal Adjustment under Uncertainty, (USA: International Monetary Fund, 2016) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper offers a non-probabilistic framework for representation of uncertainty in the context of a simple linear-quadratic model of fiscal adjustment. Instead of treating model disturbances as random variables with known probability distributions, it is only assumed that they belong to some pre-specified compact set. Such an approach is appropriate when the decision maker does not have enough information to form probabilistic beliefs or when considerations for robustness are important. Solution of the model in the minimax sense when disturbance sets are ellipsoids is obtained and the application of the method is illustrated using the example of Portugal.

Subject: Fiscal consolidation, Fiscal multipliers, Fiscal policy, Fiscal stance, Output gap, Production, Public debt

Keywords: Debt ratio, Debt sustainability concern, Decision theory, Decisions theory, Equivalent multiplier problem, Fiscal consolidation, Fiscal multipliers, Fiscal stance, Global, Growth rate, Identity matrix, Linear system, Minimax, Minimax criterion, Output gap, Output gap shock, Potential GDP, Potential GDP trajectory, Uncertainty, Utility function, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/069
Stock No:

WPIEA2016069
ISBN:

9781475521795
ISSN:

1018-5941

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