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The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models

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Author Info
Huiping Yuan () (Department of Finance, Xiamen University)
Stephen M. Miller () (Department of Economics, University of Nevada, Las Vegas)
Langnan Chen () (Institute for Economics, Sun Yat-sen University)

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Abstract

This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan.

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File URL: http://www.unlv.edu/projects/RePEc/pdf/0909.pdf
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Publisher Info
Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0909.

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Length: 35 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:nlv:wpaper:0909

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Related research
Keywords: Optimal policy; Consistent policy; Institutional design;

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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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    Other versions:
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  12. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March. [Downloadable!] (restricted)
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  14. Andrew Hughes Hallett & Diana N. Weymark, 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, Blackwell Publishing, vol. 6(1), pages 1-21, 02. [Downloadable!] (restricted)
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    Other versions:
  24. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Huiping Yuan & Stephen M. Miller, 2006. "The Making of Optimal and Consistent Policy: An Implementation Theory Framework for Monetary Policy," Working papers 2006-06, University of Connecticut, Department of Economics, revised Jan 2009. [Downloadable!]
    Other versions:
  2. Stephen M. Miller & Huiping Yuan, 2005. "Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux," Working papers 2005-55, University of Connecticut, Department of Economics, revised Jan 2009. [Downloadable!]
    Other versions:
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