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On the Treatment of Anticipated Shocks in Models of Optimal Control with Rational Expectations: An Economic Interpretation

Leonardo Auernheimer and Gabriel A Lozada

American Economic Review, 1990, vol. 80, issue 1, 157-69

Abstract: The authors suggest a general, heuristic method, based on elementary notions of price theory, for dealing with the question of anticipated changes in models of perfect foresight. The method is illustrated for the case of anticipated shocks to the state variable; in this context the standard "shadow price continuity condition" fails, while the method presented here applies. After presenting the general solution, it is used to analyze various examples of preannounced changes. Copyright 1990 by American Economic Association.

Date: 1990
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Handle: RePEc:aea:aecrev:v:80:y:1990:i:1:p:157-69