Brendon, Charles and Ellison, Martin (2018) Time-consistently undominated policies. CFM Discussion Paper Series (CFM-DP2018-01). Centre For Macroeconomics, London, UK.
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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.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://www.centreformacroeconomics.ac.uk/Discussio... |
| Additional Information: | © 2018 The Authors |
| Divisions: | Centre for Macroeconomics |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, and Operations E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination |
| Date Deposited: | 13 Mar 2018 10:13 |
| Last Modified: | 11 Dec 2024 19:27 |
| URI: | http://eprints.lse.ac.uk/id/eprint/87176 |
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