Time Consistent Control in Non-Linear Models
AbstractThis paper shows how to use optimal control theory to derive time-consistent optimal government policies in nonlinear dynamic general equilibrium models. It extends the insight of Cohen and Michel (1988), who showed that in _linear_ models time-consistent policies can be found by imposing a linear relationship between predetermined state variables and the costate variables from private agents' maximization problems. We use an analogous procedure based on the Den Haan and Marcet (1990) technique of parameterized expectations, which replaces nonlinear functions of expected future costates by flexible functions of current states. This leads to a nonlinear relationship between current state and costate variables, which is verified in equilibrium to an arbitrarily close degree of approximation. The optimal control problem of the government is recursive, unlike the Ramsey (1927) problem which is common in the optimal taxation literature. We use a model of public investment to illustrate the technique
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 282.
Date of creation: 11 Nov 2005
Date of revision:
Optimal government policy; Time consistent control;
Find related papers by JEL classification:
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-DGE-2005-11-19 (Dynamic General Equilibrium)
- NEP-MAC-2005-11-19 (Macroeconomics)
- NEP-PBE-2005-11-19 (Public Economics)
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