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National Science Foundation Award #0550564

Uncertainty and Incentives in Macroeconomic Policy

Investigator(s):

Noah Williams (PI)

Sponsor:

Princeton University, NJ 08544 6092583090

Start Date/Expiration Date

2006-07-01 to 2007-06-30 (amended 2006-01-31)

Awarded Amount to Date:

$56,122

Abstract: The proposed research consists of two distinct but related projects which explore the implications of uncertainty and asymmetric information for macroeconomic policy. The first project focuses on empirically-oriented models for the design of optimal policy, particularly monetary policy, under uncertainty. The research in this project considers the estimation of policy-relevant dynamic stochastic general equilibrium models and studies the design of optimal policy under empirically structured uncertainty. The project then develops and applies a new and relatively general method for dealing with many different forms of uncertainty. This method captures model uncertainty by embedding different structural models within a Markov chain, a setup which can be applied to a host of different applications. Overall, this project will lead to the development of theoretically sound and empirically relevant models for policy analysis, and will provide practical guidance on the conduct of policy in the uncertain environments policymakers face. The second project considers the implications of asymmetric information in dynamic environments, and quantifies the importance of information frictions in aggregate economies. While informational asymmetries have long been considered important for a host of economic issues, theoretical difficulties have hindered the development of quantitative aggregate models with information frictions. This project develops new theoretical methods which apply powerful results in continuous time stochastic control. This approach makes amenable the analysis of dynamic contracting models, and opens the door to a wide array of applications. This project will use these methods to analyze the aggregate effects of asymmetric information in efficient and equilibrium allocations, showing how the informational distortions can help explain key phenomena in economic growth, consumption, employment, and asset prices. Broader Impacts. Many of the results in the proposal have strong policy implications. In particular, most of the first project is explicitly aimed at the design of monetary policy under uncertainty. By analyzing the empirically relevant sources of uncertainty, this projects helps design policy rules which will lead to good economic performance. While the second project is more theoretical, it has implications for issues such as economic growth and employment which are of prime importance in policy discussions. This research will also be broadly disseminated. A large portion of the project deals with the development of new theoretical methods. The investigator will make well-documented user-friendly computer code available on the internet so that other researchers can apply the new methods.

NSF Org:

SES - Division of Social and Economic Sciences

Award Number:

0550564

Award Instrument:

Continuing grant

Program Manager:

Daniel H. Newlon
SES Division of Social and Economic Sciences
SBE Directorate for Social, Behavioral & Economic Sciences

NSF Program(s):

ECONOMICS

Field Application(s):

Program Reference Code(s):

UNASSIGNED, 0000

Program Element Code(s):

1320