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Time-consistently undominated policies

Author

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  • Brendon, Charles
  • Ellison, Martin

Abstract

This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and su cient conditions for this to be true, and show that these are equivalent to a straightforward but signi cant change to the fi rst-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.

Suggested Citation

  • Brendon, Charles & Ellison, Martin, 2018. "Time-consistently undominated policies," LSE Research Online Documents on Economics 87176, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:87176
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    File URL: https://researchonline.lse.ac.uk/id/eprint/87176/
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    Cited by:

    1. Marco Bassetto & Zhen Huo & José-Víctor Ríos-Rull, 2018. "Organizational Equilibrium with Capital," Working Paper Series WP-2018-20, Federal Reserve Bank of Chicago.
    2. Partha Pratim DUBE, 2020. "Least Possible Time to Reach Targeted Profit Function under Unitary Transformation," Romanian Journal of Economics, Institute of National Economy, vol. 50(1(59)), pages 05-15, June.

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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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