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Abstract

The 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 is reviewed of the discrete time solution method of Blanchard and Kahn. 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 Calvo, 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0034.

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Date of creation: Apr 1984
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Handle: RePEc:nbr:nberte:0034

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1. 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.
   
   • Bennett T. McCallum, 1983. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
2. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(2), pages 85-123.
   
   • 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.
   • Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(1), pages 85-123.
   • Buiter, Willem H & Miller, Marcus, 1981. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," The Warwick Economics Research Paper Series (TWERPS) 204, University of Warwick, Department of Economics.
   • Willem H. Buiter & Marcus H. Miller, 1982. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Working Papers 0749, National Bureau of Economic Research, Inc.
3. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
4. 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.
5. Bruno, Michael & Sachs, Jeffrey, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing," Review of Economic Studies, Wiley Blackwell, vol. 49(5), pages 679-705, Special I.
6. Willem H. Buiter & Mark Gersovitz, 1981. "Issues in Controllability and the Theory of Economic Policy," NBER Technical Working Papers 0002, National Bureau of Economic Research, Inc.
   
   • 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.
7. 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.
8. 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.
   
   • 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, 1984. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," CEPR Discussion Papers 27, C.E.P.R. Discussion Papers.
9. 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.
10. Willem H. Buiter, 1980. "The Role of Economic Policy after the New Classical Macroeconomics," NBER Working Papers 0580, National Bureau of Economic Research, Inc.
    
    • 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.
11. 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.
12. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April.
13. 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.
14. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
15. 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.
16. Willem H. Buiter & Marcus H. Miller, 1986. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues," NBER Working Papers 1252, National Bureau of Economic Research, Inc.
17. 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 473-91, June.

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Cited by:

1. Batabyal, Amitrajeet A., 1995. "Consistency and Optimality in a Dynamic Game of Pollution Control I: Competition," Working Papers 9529, Utah State University, Department of Economics.
   
   • Amitrajeet Batabyal, 1996. "Consistency and optimality in a dynamic game of pollution control I: Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(2), pages 205-220, September.
   • Batabyal, Amitrajeet A., 1995. "Consistency And Optimality In A Dynamic Game Of Pollution Control I: Competition," Economics Research Institute, ERI Study Papers 28351, Utah State University, Economics Department.
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.
   
   • Buiter, Willem H, 2004. "The Elusive Welfare Economics of Price Stability As A Monetary Policy Objective: Should New Keynesian Central Bankers Persue Price Stability," CEPR Discussion Papers 4730, C.E.P.R. Discussion Papers.
3. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Working Papers 90-09, University of Washington, Department of Economics.
   
   • 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.
   • Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Discussion Papers in Economics at the University of Washington 90-09, Department of Economics at the University of Washington.
   • Partha Sen & Stephen J. Turnovsky, 1991. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc.
4. Grande, G., 1997. "Properties of the Monetary Conditions Index," Papers 324, Banca Italia - Servizio di Studi.
   
   • Grande, Giuseppe, 1997. "Properties of the monetary conditions index," MPRA Paper 23515, University Library of Munich, Germany.
5. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei.
6. Amitrajeet Batabyal, 1996. "Consistency and optimality in a dynamic game of pollution control II: Monopoly," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(3), pages 315-330, October.
7. Willem H. Buiter, 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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