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Time-Consistent Control in Non-Linear Models

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Author Info
Steve Ambler
Florian Pelgrin
Abstract

We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem. The functions are verified in equilibrium to an arbitrarily close degree of approximation. They can be found numerically by perturbation or projection methods. We use a stochastic model of optimal public spending to illustrate the technique.

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File URL: http://www.bankofcanada.ca/en/res/wp/2007/wp07-3.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 07-3.

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Length: 32 pages
Date of creation: 2007
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Handle: RePEc:bca:bocawp:07-3

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Related research
Keywords: Fiscal policy; Monetary policy framework;

Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

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This page was last updated on 2009-11-24.

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