The Consistency of Optimal Policy in Stochastic Rational Expectations Models
AbstractThis paper extends the work of Barro and Gordon (1983) to general linear models with rational expectations. We examine the question whether the optimal policy rule, i.e. the one that a government which could pre-commit itself would use, can be sustained as a consistent rule in the sense defined by Kydland and Prescott (1977) if the reputational effects similar to those described by Barro and Gordon operate. The analysis is carried out in the context of an infinite horizon game between the government and private sector agents in the economy. We are able to show that, providing the support of the distribution of shocks hitting the economy is bounded, and providing the discount rate in the government objective function is low enough, the optimal policy rule can be sustained as a consistent policy in general. We obtain solutions for the optimal policy rule and the consistent policy rule using straightforward recursive methods and dynamic programming, and show that control theory can be made applicable to economic planning even when expectations are rational (pace Kydland and Prescott, 1977).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 124.
Date of creation: Aug 1986
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.