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Time Consistent Policymaking: The Infinite Horizon Linear-Quadratic Case

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  • Andrew P. Blake and Peter F. Westaway

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Abstract

This paper is concerned with the calculation of time consistent macroeconomic policies. We provide a taxonomy for four different infinite horizon time consistent equilibria, combining Nash and Stackelberg behaviour on the part of the policymaker with either open loop or feedback strategies. We argue that policy design exercises on estimated, usually nonlinear, models necessarily restrict attention to the open loop equilibria, which have not been studied before in this detail nor compared to the feedback equilibria. We therefore describe how such equilibria should be calculated and examine their properties. All the different time consistent equilibria are illustrated using a small stylised model of the output-inflation trade-off. We note that the open loop equilibria may not always be well defined when the instrument of the private sector, in this case the price level, is itself a target of policy.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 86.

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Date of creation: Oct 1995
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Handle: RePEc:nsr:niesrd:86

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Cited by:
  1. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy, pages 157-192 National Bureau of Economic Research, Inc.

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