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Computing Optimal Policy in a Timeless-Perspective: An Application to a Small-Open Economy

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Author Info

  • Michel Juillard
  • Florian Pelgrin

Abstract

Since the contribution of Kydland and Prescott (1977), it is well known that the optimal Ramsey policy is time inconsistent. In a series of recent contributions, Woodford (2003) proposes a new methodology to circumvent this problem, namely the timeless perspective solution. However, one main limitation is that it is not yet empirically implementable. In this paper, we develop a new methodology to compute initial values of the Lagrange multipliers in order to implement the timeless-perspective solution. In so doing, we also provide a generalization of the Ramsey and timeless-perspective problems. We apply our results to a small-open economy model in Canada.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 07-32.

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Length: 37 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-32

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Keywords: Monetary policy framework;

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References

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Citations

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Cited by:
  1. Forni, Lorenzo & Gerali, Andrea & Pisani, Massimiliano, 2010. "The macroeconomics of fiscal consolidations in euro area countries," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1791-1812, September.
  2. Pierpaolo Benigno & Michael Woodford, 2008. "Linear-Quadratic Approximation of Optimal Policy Problems," Discussion Papers 0809-01, Columbia University, Department of Economics.
  3. Richard Dennis, 2009. "Timeless Perspective Policymaking: When is Discretion Superior?," NCER Working Paper Series 38, National Centre for Econometric Research.
  4. Pelin Ilbas, 2008. "Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach," Working Paper Research 129, National Bank of Belgium.

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