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Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies

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Author Info
Miller, Marcus
Salmon, Mark

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Abstract

In 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 27.

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Date of creation: Aug 1984
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Handle: RePEc:cpr:ceprdp:27

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Related research
Keywords: Continuous-Time Economic System; Fiscal Stabilization; Full-Information Differential Games; Maximum Principle;

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  1. Willem H. Buiter, 1984. "Policy evaluation and design for continuous time linear rational expectations models: some recent development," NBER Technical Working Papers 0034, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Reinhard Neck, 1986. "Kann Stabilisierungspolitik unter Unsicherheit und Risiko "optimal" sein?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 122(III), pages 509-534, September. [Downloadable!]
  3. Andries Brandsma & J. Pijpers, 1985. "Coordinated strategies for economic cooperation between Europe and the United States," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 121(4), pages 661-681, December. [Downloadable!] (restricted)
  4. M. H. Miller, 1985. "Monetary stabilization policy in an open economy," International Finance Discussion Papers 262, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Kilponen, Juha, 2004. "Robust expectations and uncertain models – A robust control approach with application to the New Keynesian economy," Research Discussion Papers 5/2004, Bank of Finland. [Downloadable!]
    Other versions:
  6. Jeffrey A. Frankel & Katharine Rockett, 1988. "International Macroeconomic Policy Coordination When Policy-Makers Disa gree on the Model," NBER Working Papers 2059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Willem H. Buiter, 1987. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. 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. [Downloadable!] (restricted)
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