Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models / Willem H. Buiter.

Format:

Book

Author/Creator:

Buiter, Willem H.

Contributor:

National Bureau of Economic Research.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0029.

NBER technical working paper series no. t0029

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1983.

Summary:

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.

Notes:

Print version record

August 1983.