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Dynamic Optimization in Two-Party Models

Warwick McKibbin (), Nouriel Roubini () and Jeffrey Sachs

No 2213, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

Date: 1987-04
Note: EFG
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