IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/124.html
   My bibliography  Save this paper

The Consistency of Optimal Policy in Stochastic Rational Expectations Models

Author

Listed:
  • Backus, David
  • Driffill, John

Abstract

This paper extends the work of Barro and Gordon (1983) to general linear models with rational expectations. We examine the question whether the optimal policy rule, i.e. the one that a government which could pre-commit itself would use, can be sustained as a consistent rule in the sense defined by Kydland and Prescott (1977) if the reputational effects similar to those described by Barro and Gordon operate. The analysis is carried out in the context of an infinite horizon game between the government and private sector agents in the economy. We are able to show that, providing the support of the distribution of shocks hitting the economy is bounded, and providing the discount rate in the government objective function is low enough, the optimal policy rule can be sustained as a consistent policy in general. We obtain solutions for the optimal policy rule and the consistent policy rule using straightforward recursive methods and dynamic programming, and show that control theory can be made applicable to economic planning even when expectations are rational (pace Kydland and Prescott, 1977).

Suggested Citation

  • Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:124
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=124
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:124. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.