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On the Treatment of Anticipated Shocks in Models of Optimal Control with Rational Expectations: An Economic Interpretation

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  • Auernheimer, Leonardo
  • Lozada, Gabriel A

Abstract

The authors suggest a general, heuristic method, based on elementary notions of price theory, for dealing with the question of anticipated changes in models of perfect foresight. The method is illustrated for the case of anticipated shocks to the state variable; in this context the standard "shadow price continuity condition" fails, while the method presented here applies. After presenting the general solution, it is used to analyze various examples of preannounced changes. Copyright 1990 by American Economic Association.

Suggested Citation

  • Auernheimer, Leonardo & Lozada, Gabriel A, 1990. "On the Treatment of Anticipated Shocks in Models of Optimal Control with Rational Expectations: An Economic Interpretation," American Economic Review, American Economic Association, vol. 80(1), pages 157-169, March.
  • Handle: RePEc:aea:aecrev:v:80:y:1990:i:1:p:157-69
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    Cited by:

    1. Coyne, Christopher J. & Dempster, Gregory M. & Isaacs, Justin P., 2010. "Asset values and the sustainability of peace prospects," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 146-156, May.
    2. Christopher Coyne & Gregory Dempster & Justin Isaacs, 2009. "Asset Values and the Credibility of Peace Agreements," Working Papers 09-07, Department of Economics, West Virginia University.
    3. Ellis, Michael A. & Auernheimer, Leonardo, 1996. "Stabilization under capital controls," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 523-533, August.
    4. Trimborn, Timo, 2007. "Anticipated Shocks in Continuous-time Optimization Models: Theoretical Investigation and Numerical Solution," Hannover Economic Papers (HEP) dp-363, Leibniz Universit├Ąt Hannover, Wirtschaftswissenschaftliche Fakult├Ąt.
    5. Gregory M. Dempster & Justin P. Isaacs, 2011. "Conflict, Credibility and Asset Prices," Chapters,in: The Handbook on the Political Economy of War, chapter 24 Edward Elgar Publishing.

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