Optimal Fiscal Adjustment under Uncertainty

Author/Editor:

Rossen Rozenov

Publication Date:

March 17, 2016

Electronic Access:

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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.

Series:

Working Paper No. 16/69

Subject:

English

Publication Date:

March 17, 2016

ISBN/ISSN:

9781475521795/1018-5941

Stock No:

WPIEA2016069

Format:

Paper

Pages:

51

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