Essays on inflation forecast based rules, robust policies and sovereign debt

The success of inflation reduction in industrial countries along with the adoption of inflation targeting regimes by many central banks has prompted considerable interest in “feedback rules” for inflation targeting. Over the past few years, much research has been devoted to assessing the performance of these rules. The first essay provides an optimal policy responsiveness of inflation forecast based (IFB) rules to inflation and/or output shocks in order to lead inflation and output state variables back to their equilibrium value. The rendered system of equations is a bilinear one that becomes the restriction for the quadratic criterion function used in control theory problems. There has been a recent interest in the use of robust control techniques for economic policies. Analyzing a control variable response as the degree of robustness rises is important in advancing our understanding of the application of robust control methods to economic models. The second and third essays provide an analytical framework derived from one-state one-control robust control problem in order to understand the relationship between the control variable and unstructured model uncertainty. Seeking a robust policy rule for a variety of different structural macroeconomic models is an important exercise to determine if an IFB rule would be adequate to meet some performance criteria in the face of model uncertainty. Robust performance is all about finding a rule that makes it possible to have some similar, if not equal, performance across different models. However, before a rule becomes robust performance-wise, it must be robust stability-wise. The fourth essay provides a way of searching for IFB rules that are robust to two different structural macroeconomic models. First, we find the IFB rules that accomplish robust stability by using the root-locus method. Second, we find a subset of such rules that accomplish similar performances across both models – i.e. robust rules.

Finally, the fifth essay uses and compares some data mining techniques to understand and predict sovereign debt rescheduling. Receiver Operating Characteristic Curves are used to measure the discrimination power of models. Moreover, the issue of interpretability of models for sovereign debt rescheduling is addressed.