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Policy Evaluation and Design for Continuous Time Linear Rational Expectations Models: Some Recent Developments

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  • Buiter, Willem H.

Abstract

This paper surveys some recent developments in policy evaluation and design in continuous time linear rational expectations models. Much recent work in macroeconomics and open economy macroeconomics fits into this category. First the continuous time analogue of the discrete time solution method of Blanchard and Kahn is reviewed. Some problems associated with this solution method are then discussed, including non-uniqueness and zero roots. Optimal (but in general time-inconsistent) and time-consistent (but in general suboptimal) solutions are derived to the general linear-quadratic optimal control problem, based on work by Calco, Driffill, Miller and Salmon and the author. A numerical example is solved, involving optimal and time-consistent anti-inflationary policy design in a contract model.

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  • Buiter, Willem H., 1984. "Policy Evaluation and Design for Continuous Time Linear Rational Expectations Models: Some Recent Developments," CEPR Discussion Papers 15, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15
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    1. Willem H. Buiter & Marcus Miller, 1991. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 239-277, National Bureau of Economic Research, Inc.
    2. D. Currie & P. Levine, 1982. "A Solution Technique for Discrete and Continuous Time Stochastic Dynamic Models under Rational Expectations with Full & Partial Information Sets," Working Papers 87, Queen Mary University of London, School of Economics and Finance.
    3. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    4. Buiter, Willem H. & Gersovitz, Mark, 1981. "Issues in controllability and the theory of economic policy," Journal of Public Economics, Elsevier, vol. 15(1), pages 33-43, February.
    5. Miller, Marcus & Salmon, Mark, 1985. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," Economic Journal, Royal Economic Society, vol. 95(380a), pages 124-137, Supplemen.
    6. Jacob A. Frenkel, 1983. "Exchange Rates and International Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number fren83-1, March.
    7. Willem H. Buiter, 1980. "The Role of Economic Policy After the New Classical Macroeconomics," NBER Technical Working Papers 0006, National Bureau of Economic Research, Inc.
    8. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April.
    9. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(5), pages 679-705.
    10. Lipton, David, et al, 1982. "Multiple Shooting in Rational Expectations Models [The Solution of Linear Difference Models under Rational Expectations]," Econometrica, Econometric Society, vol. 50(5), pages 1329-1333, September.
    11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    12. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
    13. Jennifer F. Reinganum & Nancy L. Stokey, 1981. "The Period of Commitment in Dynamic Games," Discussion Papers 508R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K.Manufacturing," NBER Working Papers 0851, National Bureau of Economic Research, Inc.
    15. Willem H. Buiter, 1981. "A Note on the Solution of A Two-Point Boundary Value Problem Frequently Encountered in Rational Expectations Models," NBER Technical Working Papers 0012, National Bureau of Economic Research, Inc.
    16. Guillermo A. Calvo, 1983. "Staggered Contracts and Exchange Rate Policy," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 235-258, National Bureau of Economic Research, Inc.
    17. Willem H. Buiter & Marcus Miller, 1983. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation: Some Further Results," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 317-368, National Bureau of Economic Research, Inc.
    18. Olivier J. Blanchard, 1983. "Methods of Solution and Simulation for Dynamic Rational Expectations Models," NBER Technical Working Papers 0028, National Bureau of Economic Research, Inc.
    19. Willem H. Buiter, 1983. "Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models," NBER Technical Working Papers 0029, National Bureau of Economic Research, Inc.
    20. Willem H. Buiter & Marcus H. Miller, 1983. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues," NBER Working Papers 1252, National Bureau of Economic Research, Inc.
    21. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    1. Amitrajeet Batabyal, 1996. "Consistency and optimality in a dynamic game of pollution control I: Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 8(2), pages 205-220, September.
    2. Willem H. Buiter, 2004. "The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?," NBER Working Papers 10848, National Bureau of Economic Research, Inc.
    3. Amitrajeet Batabyal, 1996. "Consistency and optimality in a dynamic game of pollution control II: Monopoly," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 8(3), pages 315-330, October.
    4. Sen, Partha & Turnovsky, Stephen J., 1990. "Investment tax credit in an open economy," Journal of Public Economics, Elsevier, vol. 42(3), pages 277-299, August.
    5. van der Ploeg, Frederick, 1987. "International Interdependence and Policy Coordination in Economies with Real and Nominal Wage Rigidity," CEPR Discussion Papers 217, C.E.P.R. Discussion Papers.
    6. Grande, Giuseppe, 1997. "Properties of the monetary conditions index," MPRA Paper 23515, University Library of Munich, Germany.
    7. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei.
    8. Buiter, Willem H., 2006. "The elusive welfare economics of price stability as a monetary policy objective: why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank.

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