Title:
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Time-consistently undominated policies
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Author:
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Brendon, Charles; Ellison, Martin
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Abstract:
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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 sufficient
conditions for this to be true, and show that these are equivalent to a straightforward but significant
change to the first-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. |
Abstract:
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The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. |
Subject(s):
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-Time consistency -Undominated policy -Ramsey policy |
Rights:
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This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
https://creativecommons.org/licenses/by/4.0/
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Document type:
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Working Paper |
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