Time-Consistently Undominated Policies

Charles Brendon and Martin Ellison

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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 Paretodominates 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.

Keywords: Time Consistency; Undominated Policy; Ramsey Policy (search for similar items in EconPapers)
JEL-codes: D02 E61 (search for similar items in EconPapers)
Date: 2018-01-26
New Economics Papers: this item is included in nep-mac
Note: cfb46
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Time-Consistently Undominated Policies (2018)
Working Paper: Time-Consistently Undominated Policies (2018)
Working Paper: Time-consistently undominated policies (2018)
Working Paper: Time-Consistently Undominated Policies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1809

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