Design Limits and Dynamic Policy Analysis
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NBER Working Paper No. 14357
Issued in September 2008
NBER Program(s): EFG ME
This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different rules affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce increases in variance at others. Tradeoffs of this type are known in the control literature as design limits. Design limits are important in understanding the full range of effects of stabilization policies. We extend existing results to account for discrete time bivariate systems with rational expectations. Application is made to the evaluation of monetary policy rules.
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