Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models
14 Pages Posted: 7 Nov 2007 Last revised: 30 Jan 2023
Date Written: August 1983
Abstract
In this note the method of Hamiltonian dynamics is used to characterize the time-consistent solution to the optimal control problem in a deterministic continuous time rational expectations model. A linear quadratic example based on the work of Miller and Salmon is used for simplicity. To derive the time-consistent rational expectations (or subgame-perfect) solution we first characterize the optimal solution made familiar e.g. through the work of Calvo. The time-consistent solution is then obtained by modifying the optimal solution through the requirement that the co-state variables (shadow prices) of the non-predetermined variables be zero at each instant. Existing solution methods and computational algorithms can be used to obtain the behaviour of the system under optimal policy and under time-consistent policy.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Superiority of Contingent Rules Over Fixed Rules in Models with Rational Expectations
-
Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues
By Willem H. Buiter and Marcus H. Miller
-
Issues in Controllability and the Theory of Economic Policy
By Willem H. Buiter and Mark Gersovitz