An Analysis of the Impact of Finite Horizons on Macroeconomic Control

Andrew Peter Blake () and Peter F Westaway

Oxford Economic Papers, 1995, vol. 47, issue 1, pages 98-116

Abstract: Macroeconomic control exercises using large-scale nonlinear consistent expectations models necessarily employ a finite time horizon. By contrast, much of the analytic literature has focused on the linear-quadratic infinite horizon problem, for which closed-form solutions are easy to derive and offer convenient interpretation. This paper examines the extent to which the imposed finite time horizon distorts the optimal policy. The authors compare the effects on the reputational time inconsistent solution with those on time consistent strategies using both a large nonlinear consistent expectations model and a compact linearized version. Copyright 1995 by Royal Economic Society.

Date: 1995

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