TY  - JOUR
AU  - Brock,William A.
AU  - Durlauf,Steven N.
TI  - Elements of a Theory of Design Limits to Optimal Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10495
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10495
L1  - http://www.nber.org/papers/w10495.pdf
N1  - Author contact info:
William Brock
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI   537061393
E-Mail: wbrock@ssc.wisc.edu

Steven N. Durlauf
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/263-3859
Fax: 608/262-2033
E-Mail: sdurlauf@ssc.wisc.edu
AB  - This paper presents a framework for understanding the limits that exist in optimal policy design in dynamic contexts. We consider the design of policies in the context of dynamic linear models. Fundamental design limits exist for policy rules in such environments in the sense that any policy rule embodies tradeoffs between the magnitudes of different frequency-specific components of the variance. Hence policies that are effective in eliminating low frequency variance components of a state variable can only do so at the cost of exacerbating high frequency variance components, and vice versa. Examples of the implications of such tradeoffs are considered.
ER  -