The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models

Huiping Yuan (), Stephen Miller and Langnan Chen
Additional contact information
Langnan Chen: Sun Yat-sen University

No 2006-05, Working papers from University of Connecticut, Department of Economics

Abstract: This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan.

JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-02, Revised 2009-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: We presented an earlier version at Federal Reserve Bank of San Francisco. We thank Richard Dennis, Mark Spiegel, and Tao Wu for helpful comments and assistance.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Scottish Journal of Political Economy, February 2011, with the title "The Optimality and Controllability of Monetary Policy through Delegation with Consistent Targets."

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Related works:
Journal Article: THE OPTIMALITY AND CONTROLLABILITY OF MONETARY POLICY THROUGH DELEGATION WITH CONSISTENT TARGETS (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2006-05

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