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Time-consistently undominated policies

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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: http://eprints.lse.ac.uk/87176/
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    References listed on IDEAS

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    More about this item

    Keywords

    time consistency; undominated policy; Ramsey policy;

    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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