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The first two sections of this article discuss the implications of uncertainty in response to policy actions for the selection of optimal economic policy. Optimal policy in the presence of this type of uncertainty is found to differ significantly from optimal policy in a world of certainty. For exam...
|a The first two sections of this article discuss the implications of uncertainty in response to policy actions for the selection of optimal economic policy. Optimal policy in the presence of this type of uncertainty is found to differ significantly from optimal policy in a world of certainty. For example, in general all instruments are used, even if there is only one target variable. Analysis of the optimality question also provides some insight into what constitutes effectiveness. In the third section it is shown that, not surprisingly, the way a structural change alters the effectiveness of policy depends on how it affects both the expected magnitude and the predictability of response to policy actions. The third section goes on to discuss briefly some of the problems involved in assessing the consequences of structural change for the effectiveness of policy when there are several instruments and several targets, and where the structural change affects the response of the system to disturbances as well as policy instruments.
