NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Stabilization Rules in a Stochastic Model of Investment with Gestation Lags

John B. Taylor

NBER Working Paper No. 1225 (Also Reprint No. r0518)
Issued in November 1983
NBER Program(s):   EFG

This paper considers the problem of calculating optimal policy rules to stabilize fluctuations in investment in an economy where firms' investment behavior can be described by a dynamic optimization model. In the optimization model, the dynamics of investment are generated by heterogeneous gestation lags between the start and completion of capital projects, rather than by adjustment costs in the installation of capital. A procedure is derived for calculating policy rules for an arbitrary autoregressive process generating fluctuations in firms sales. Through stochastic simulation we investigate the effects of using certain suboptimal policy rules in cases where there are constraints against using the optimal rules.

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Document Object Identifier (DOI): 10.3386/w1225

Published: Taylor, John B. "Optimal Stabilization Rules in a Stochastic Model of Investments with Gestation Lags." Studies in Econometrics, Time Series, & Multivariate Statistics, ed. by Samuel Karlin, Takeshi Amemiya, Leo Goodman, (Academic Press, 1983), pp. 207-226.

 
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