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Time-Consistent Control in Non-Linear Models

  • Steve Ambler
  • Florian Pelgrin

We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem. The functions are verified in equilibrium to an arbitrarily close degree of approximation. They can be found numerically by perturbation or projection methods. We use a stochastic model of optimal public spending to illustrate the technique.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp07-3.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 07-3.

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Length: 32 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-3
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  9. Andrew Blake & Tatiana Kirsanova, 2008. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Discussion Papers 0813, Exeter University, Department of Economics.
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