Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies
AbstractIn this paper the Maximum Principle is used to derive optimal policies for linear-quadratic, continuous-time economic systems where there may be more than one policy-maker and where the private sector may have rational expectations. The analogy between solving full-information differential games and designing policy in the presence of forward-looking expectations is explored first, before these two problems are considered in combination. Both the "term inconsistent" optimal policy which arises from strategic asymmetries, and various time consistent alternatives are discussed; and the approach is illustrated with an application to fiscal stabilisation policy in a Common Market.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 27.
Date of creation: Aug 1984
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Other versions of this item:
- 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 124-37, Supplemen.
- Miller, Marcus & Salmon, Mark, 1983. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," The Warwick Economics Research Paper Series (TWERPS) 232, University of Warwick, Department of Economics.
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