A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables

Jean-Bernard Chatelain and Kirsten Ralf

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Abstract: This article presents an algorithm that extends Ljungqvist and Sargent's (2012) dynamic Stackelberg game to the case of dynamic stochastic general equilibrium models including forcing variables. Its first step is the solution of the discounted augmented linear quadratic regulator as in Hansen and Sargent (2007). It then computes the optimal initial anchor of "jump" variables such as inflation. We demonstrate that it is of no use to compute non-observable Lagrange multipliers for all periods in order to obtain impulse response functions and welfare. The algorithm presented, however, enables the computation of a history-dependent representation of a Ramsey policy rule that can be implemented by policy makers and estimated within a vector auto-regressive model. The policy instruments depend on the lagged values of the policy instruments and of the private sector's predetermined and "jump" variables. The algorithm is applied on the new-Keynesian Phillips curve as a monetary policy transmission mechanism.

Keywords: forcing variables; new-Keynesian Phillips curve; Stackelberg dynamic game; augmented linear quadratic regulator; Ramsey optimal policy; algorithm (search for similar items in EconPapers)
Date: 2019-10-25
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac and nep-ore
Note: View the original document on HAL open archive server: https://hal.science/hal-01577606v3
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Citations: View citations in EconPapers (26)

Published in Economics Bulletin, 2019, 39 (4), pp.2429-2440

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Related works:
Journal Article: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2019)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2019)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2019)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2019)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2019)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2017)
Working Paper: A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables (2017)
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