Dynamic Optimization in Two-Party Models
Warwick McKibbin (),
Nouriel Roubini () and
No 2213, NBER Working Papers from National Bureau of Economic Research, Inc
The goal of this paper is to study the problem of optimal dynamic policy formulation with competing political parties. We study a general class of problems, in which the two competing political parties have quadratic intertemporal objective functions, and in which the economy has a linear structure and a multidimensional state space. For the general linear quadratic problem we develop a numerical dynamic programming algorithm to solve for optimal policies of each party taking into account the party's objectives; the structure of the economy ; the probability of future election results; and the objectives of the other political party.
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