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Computing Optimal Policy in a Timeless-Perspective: An Application to a Small-Open Economy

  • Michel Juillard
  • Florian Pelgrin

Since the contribution of Kydland and Prescott (1977), it is well known that the optimal Ramsey policy is time inconsistent. In a series of recent contributions, Woodford (2003) proposes a new methodology to circumvent this problem, namely the timeless perspective solution. However, one main limitation is that it is not yet empirically implementable. In this paper, we develop a new methodology to compute initial values of the Lagrange multipliers in order to implement the timeless-perspective solution. In so doing, we also provide a generalization of the Ramsey and timeless-perspective problems. We apply our results to a small-open economy model in Canada.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 07-32.

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Length: 37 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-32
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