Discounted Linear Exponential Quadratic Gaussian Control

Lars Hansen and Thomas Sargent

Chapter 2 in Uncertainty within Economic Models, 2014, pp 23-32 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter formulates a version of a discounted Gaussian optimal linear regulator in which the return function is modified as suggested in Jacobson (1973), Jacobson (1977), Whittle (1981), Whittle (1989a), and Whittle (1990) to incorporate a risk adjustment. In Jacobson (1973), the problem is formulated for the undiscounted case. Contributions Bouakiz and Sobel (1985) and Whittle (1990) described how recursions on a Riccati difference equation apply to a discounted version of the problem. In their formulation with discounting, the optimal decision rules fail to be time-invariant: over time the effects of the risk-parameter “wear off,” and the decision rules eventually converge to what would prevail in the usual linear-quadratic case…

Keywords: Uncertainty; Economic Models; Econometrics; Dynamic Programming; Macroeconomics; Robustness; Robust Control Theory; Agents; Market Prices; Model Misspecification (search for similar items in EconPapers)
Date: 2014
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