Open AccessImpulse-Based Computation of Policy Counterfactuals
Author(s) -
James Hebden,
Fabian Winkler
Publication year - 2021
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2021.042
Subject(s) - counterfactual conditional , counterfactual thinking , imperfect , construct (python library) , impulse (physics) , shock (circulatory) , monetary policy , perfect information , impulse response , computation , state variable , economics , policy analysis , econometrics , computer science , mathematical economics , mathematics , macroeconomics , algorithm , political science , philosophy , law , mathematical analysis , linguistics , epistemology , quantum mechanics , medicine , thermodynamics , programming language , physics
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints. The procedure does not require knowledge of the structural or reduced-form equations of the model, its state variables, or its shock processes. Forecasts of the variables entering the policy problem, and impulse response functions of these variables to anticipated policy shocks under an arbitrary policy, constitute sufficient information to construct valid counterfactuals. We show how to compute solutions for instrument rules and optimal discretionary and commitment policies with multiple policy instruments, and discuss various extensions, including imperfect information, asymmetric objectives, and limited commitment. Our procedure facilitates the comparison of the effects of policy regimes across models. As an application, we compute counterfactual paths of the U.S. economy around 2015 for several monetary policy regimes.