Risk-sensitive Optimal Control with Forward-looking Variables
Author | : Guido Traficante |
Publisher | : |
Total Pages | : 0 |
Release | : 2023 |
ISBN-10 | : OCLC:1378808220 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Risk-sensitive Optimal Control with Forward-looking Variables written by Guido Traficante and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We discuss how to solve infinite-horizon optimal control problems with recursive preferences à la Hansen and Sargent (1995) when both backward and forward-looking variables enter into the law of motion regulating the system dynamics. With our analysis we establish: 1) under which conditions the risk-adjustment in the objective function of the standard linear-quadratic formulation introduced by Hansen and Sargent affects the optimal policy; 2) how the optimal rule in a stationary solution is identified solving two distinct fixed-point problems, the former pertaining to the optimization exercise, the latter to the expected values of the forward-looking variables. Applying our methodology to Smets and Wouters' (Smets and Wouters, 2003) new-Keynesian model of monetary policy, we show how a central bank endowed with recursive preferences `a la Hansen and Sargent (1995) selects a more aggressive policy than one furnished with quadratic costs.