2019

DOI: 10.2139/ssrn.3418158

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U.S. Macroeconomic Policy Evaluation in an Open Economy Context Using Wavelet Decomposed Optimal Control Methods

Patrick M. Crowley

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Macroeconomic Model Derivation and Estimation3

Modwt Wavelet Analysis2

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Cited by 5 publications

(5 citation statements)

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“…Our model uses the satisfactory estimation results from Crowley and Hudgins (2019, appendix tables A1–A7), which are computed using data for the post‐Bretton Woods period 1973 quarter 3–2018 quarter 2. The government spending coefficients ( β C , j ,2 ) all have the expected positive signs, and are statistically significant.…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…We substitute the variable G e from Equations (9) and (10) into Equation (3) so that it replaces G , and then augment the system with the government debt and government trend spending to obtain the reduced form equation for determining consumption at each frequency. Based on the estimates in Crowley and Hudgins (2019, appendix table A1) and the rational expectation parameters, the consumption equation is given as follows:

\begin{matrix} C_{j ; k} = δ_{j, 0} + δ_{j, 1} C_{j, k ‐ 1} + δ_{j, 2} G_{j, k ‐ 1} + δ_{j, 3} + δ_{j, 4} C_{j, k ‐ 2} \\ + δ_{j, 5} R E R_{j, k ‐ 1} + δ_{j, 6} R E R_{j, k ‐ 2} + δ_{j, 7} D E B T_{k ‐ 1} + ω_{C, j, k ‐ 1} \end{matrix}

…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…The U.S. quarterly national income data are chain‐weighted, seasonally adjusted and in 2012 prices, sourced from the BEA database. Crowley and Hudgins (2019) plot the wavelet decompositions for the US interest rate, the foreign interest rate, and the real exchange rate ( RER ).…”

Section: Modwt Wavelet Analysismentioning

confidence: 99%

“…In Equation (13), equilibrium is maintained in the money and asset markets, where the coefficient estimates for quarterly real money growth (as measured by the difference between M2 money growth and inflation) are provided in Crowley and Hudgins (2019, appendix table A7). When the central bank decides to increase the real interest rate, it achieves this by maintaining a tighter monetary stance that leads to a decrease in growth of the real money stock, so that β MS ,1 < 0.…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…8 Table 1 defines the time-frequency ranges for the wavelet decompositions. Crowley and Hudgins (2019) provides a detailed depiction of the wavelet-decomposed post-Bretton-Woods US GDP component data and financial data. The U.S. quarterly national income data are chainweighted, seasonally adjusted and in 2012 prices, sourced from the BEA database.…”

Section: Modwt Wavelet Analysismentioning

confidence: 99%

See 4 more Smart Citations

Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?

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,

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2021

The Manchester School

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It has recently been widely recognized that monetary policy objectives change through time as our understanding of monetary policy and its impact on the macroeconomy evolves. In recent years there has been an extensive review of the framework for monetary policy at major central banks around the world, given the practical problems that have been encountered with inflation targets. This paper is a contribution to this debate, in that the aim of this paper is to evaluate the consequences of adopting different monetary policy objectives in the U.S. macroeconomic policy setting. To accomplish this, we first decompose U.S. macroeconomic data using a time‐frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short‐term monetary targets: an inflation target, a money growth target, an interest rate target, and a real economic growth target. The results show that the most effective monetary policy targets to achieve economic growth are either inflation targets or economic growth targets.

“…Our model uses the satisfactory estimation results from Crowley and Hudgins (2019, appendix tables A1–A7), which are computed using data for the post‐Bretton Woods period 1973 quarter 3–2018 quarter 2. The government spending coefficients ( β C , j ,2 ) all have the expected positive signs, and are statistically significant.…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…We substitute the variable G e from Equations (9) and (10) into Equation (3) so that it replaces G , and then augment the system with the government debt and government trend spending to obtain the reduced form equation for determining consumption at each frequency. Based on the estimates in Crowley and Hudgins (2019, appendix table A1) and the rational expectation parameters, the consumption equation is given as follows:

\begin{matrix} C_{j ; k} = δ_{j, 0} + δ_{j, 1} C_{j, k ‐ 1} + δ_{j, 2} G_{j, k ‐ 1} + δ_{j, 3} + δ_{j, 4} C_{j, k ‐ 2} \\ + δ_{j, 5} R E R_{j, k ‐ 1} + δ_{j, 6} R E R_{j, k ‐ 2} + δ_{j, 7} D E B T_{k ‐ 1} + ω_{C, j, k ‐ 1} \end{matrix}

…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…The U.S. quarterly national income data are chain‐weighted, seasonally adjusted and in 2012 prices, sourced from the BEA database. Crowley and Hudgins (2019) plot the wavelet decompositions for the US interest rate, the foreign interest rate, and the real exchange rate ( RER ).…”

Section: Modwt Wavelet Analysismentioning

confidence: 99%

“…In Equation (13), equilibrium is maintained in the money and asset markets, where the coefficient estimates for quarterly real money growth (as measured by the difference between M2 money growth and inflation) are provided in Crowley and Hudgins (2019, appendix table A7). When the central bank decides to increase the real interest rate, it achieves this by maintaining a tighter monetary stance that leads to a decrease in growth of the real money stock, so that β MS ,1 < 0.…”

Section: Macroeconomic Model Derivation and Estimationmentioning

confidence: 99%

“…8 Table 1 defines the time-frequency ranges for the wavelet decompositions. Crowley and Hudgins (2019) provides a detailed depiction of the wavelet-decomposed post-Bretton-Woods US GDP component data and financial data. The U.S. quarterly national income data are chainweighted, seasonally adjusted and in 2012 prices, sourced from the BEA database.…”

Section: Modwt Wavelet Analysismentioning

confidence: 99%

See 3 more Smart Citations

Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?

¹

,

²

2021

The Manchester School

Self Cite

View full text Add to dashboard Cite

It has recently been widely recognized that monetary policy objectives change through time as our understanding of monetary policy and its impact on the macroeconomy evolves. In recent years there has been an extensive review of the framework for monetary policy at major central banks around the world, given the practical problems that have been encountered with inflation targets. This paper is a contribution to this debate, in that the aim of this paper is to evaluate the consequences of adopting different monetary policy objectives in the U.S. macroeconomic policy setting. To accomplish this, we first decompose U.S. macroeconomic data using a time‐frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short‐term monetary targets: an inflation target, a money growth target, an interest rate target, and a real economic growth target. The results show that the most effective monetary policy targets to achieve economic growth are either inflation targets or economic growth targets.

Okun’s law revisited in the time–frequency domain: introducing unemployment into a wavelet-based control model

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2021

View full text Add to dashboard Cite

No abstract

Resilient Control for Macroeconomic Models

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2022

Self Cite

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This paper derives a macroeconomic resilient control framework that provides the optimal feedback fiscal and monetary policy responses in response to a potentially large negative external incident. We simulate the model for the U.S. under the conditions that prevailed throughout the 2020 economic crisis that occurred due to the government lockdown that was caused by the coronavirus pandemic. We develop a discrete-time soft-constrained linear-quadratic dynamic game under a worst-case design with multiple disturbances. Within this context, we introduce a resilience feedback response and compare the case where the policymakers counter in response the external incident with the case when they do not counter. This framework is especially applicable to large-scale macroeconomic tracking control models and wavelet-based control models when formulating the magnitudes of the policy changes necessary for the unemployment rate and national output variables to maintain acceptable tracking errors in the periods following a major disruption. Our policy recommendations include the maintenance of “rainy day” funds at appropriate levels of government to mitigate the effects of large adverse events.

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