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Tales of transition paths
policy uncertainty and random walks
von Josef Hollmayr und Christian MatthesWhat happens when scal and/or monetary policy changes systematically? We
construct a DSGE model in which agents have to estimate scal and monetary
policy rules and assess how uncertainty surrounding the conduct of policymakers
in
uences transition paths after policy changes. We nd that policy changes of
the magnitude often considered in the literature can lead private agents to hold
substantially dierent views about the nature of equilibrium than would be predicted
by a full information analysis. In particular, random walk-like behavior can be
observed for a large number of periods in equilibrium, even though the models we
use admit stationary dynamics under full-information rational expectations.
construct a DSGE model in which agents have to estimate scal and monetary
policy rules and assess how uncertainty surrounding the conduct of policymakers
in
uences transition paths after policy changes. We nd that policy changes of
the magnitude often considered in the literature can lead private agents to hold
substantially dierent views about the nature of equilibrium than would be predicted
by a full information analysis. In particular, random walk-like behavior can be
observed for a large number of periods in equilibrium, even though the models we
use admit stationary dynamics under full-information rational expectations.