Fiscal policy tracking design in the time frequency domain using wavelet analysis

Arbeitspapier

In this paper discrete wavelet filtering techniques are applied to decompose macroeconomic data so that they can be simultaneously analyzed in both the time and frequency domains. The MODWT (Maximal Overlap Discrete Wavelet Transform) is applied to U.S. quarterly GDP data from 1947–2012 to obtain the underlying cyclical structure of the GDP components. A MATLAB program is then used to design optimal fiscal policy within a LQ-tracking model with wavelet decomposition, and the results are compared with an aggregate model with no frequency decomposition. The results show that fiscal policy is more active under the wavelet-based model, and that the consumption and investment trajectories under the aggregate model are misaligned. We also simulate FHEC (Frequency Harmonizing Emphasis Control) strategies that allow policymakers to concentrate the policy thrust on tracking frequencies that are optimally aligned with policy goals under different targeting priorities. These strategies are only available by using time-frequency analysis. This research is the first to construct fiscal policy in an applied optimal control model on the short and cyclical lag structures obtained from wavelet analysis. Our wavelet-based optimal control procedure allows the policymaker to construct a pragmatic tracking policy, avoid suboptimal policies gleaned from an aggregate model, and reduce the potential for destabilization that might otherwise result due to improper thrust and timing.

Object Details

• ISBN: 978-952-323-015-6
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 32/2014

Classification and Topics

• Classification: Wirtschaft ; Econometric and Statistical Methods: Special Topics: Other ; Optimization Techniques; Programming Models; Dynamic Analysis ; Computational Techniques; Simulation Modeling ; Data Collection and Data Estimation Methodology; Computer Programs: Other Computer Software ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: LQ tracking ; macroeconomics ; optimal control ; discrete wavelet analysis ; fiscal policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Crowley, Patrick M. ; Hudgins, David
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/212307
• Last update: 10.03.2025, 11:44 AM CET