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Time-consistent control in nonlinear models

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  • Ambler, Steve
  • Pelgrin, Florian
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    Abstract

    The paper shows how to use optimal control to compute optimal time-consistent Markovian government policies in nonlinear dynamic general equilibrium models. It extends Cohen and Michel's (1988) results for the linear-quadratic case. The method involves replacing private agents' costate variables with flexible functions of current state variables in the government's maximization problem. The functions hold in equilibrium to an arbitrarily close approximation. They can be found numerically by perturbation or projection methods. A stochastic model of optimal public spending illustrates the technique.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2215-2228

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:2215-2228

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Optimal government policy Time consistency Control theory;

    References

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    Cited by:
    1. Richard Dennis, 2013. "Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive," Working Papers 2013_15, Business School - Economics, University of Glasgow.
    2. Alfonso Novales & Rafaela Pérez & Jesús Rúiz, 2013. "Optimal time-consistent fiscal policy in an endogenous growth economy with public consumption and capital," Documentos de Trabajo del ICAE 2013-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Mário Amorim Lopes & Fernando A. C. C. Fontes & Dalila A. C. C. Fontes, 2013. "Optimal Control of Infinite-Horizon Growth Models — A direct approach," FEP Working Papers 506, Universidade do Porto, Faculdade de Economia do Porto.

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