Caution in macroeconomic policy: uncertainty and the relative intensity of policy

In a one-state two-control Quadratic Linear Problem, we use the Riccati equations to examine the effect of an increase in uncertainty in a future time period on the optimal use of the control variables in the first time period. We find that caution or more intensity in the outcome depends on the ratio of the weight on each control variable to the variance of the parameter which multiplies that control. When these ratios are not equal, the control with a smaller weighted variance will always be used more intensely. When these ratios are equal, both control variables will always be used more intensely. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: C61; E61.