Uncertainty and the effectiveness of policy

Economists concerned with aggregative spend a great deal of their time discussing the implications of various structural changes for the of economic policy. In recent years, for example, monetary economists have debated at great length whether the rapid growth of nonbank financial intermediaries has lessened the of conventional instruments of monetary control. Similarly, in discussions of the desirability of the addition or removal of specific financial regulations the consequences for the of play an important role. One of the striking features of many of these discussions is the absence of any clear notion of what effectiveness is. At times it appears to be simply bang per buck-how large a change in some crucial variable (e.g., the long-term bond rate) results from a given change in a variable (e.g., open market operation). A natural question to ask is why a halving of in this sense should not be met simply by doubling the dose of policy, with equivalent results. It seems reasonable to suppose that the consequences of a structural change for the of should be related to how it affects the policy-maker's performance in meeting his objectives. Suppose, for example, that the policy-maker wants to maximize a utility function which depends on the values of target variables. If, after some structural change, the policy-maker finds he is able to score higher on his utility function, then presumably the structural change has improved the of and vice versa. One of the implications of the of policy in a world of [6] or certainty equivalence [1] [3] [4] [5] is that structural changes which simply alter the magnitude of the response to do not alter the attainable utility level.' Hence such structural changes do not alter in the above sense. Another feature of the theory of in a world of