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Time-Consistently Undominated Policies

Martin Ellison () and Charles Brendon

No 844, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and sufficient conditions for this to be true, and show that these are equivalent to a straightforward but significant change to the first-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.

Keywords: Time Consistency; Undominated Policy; Ramsey Policy (search for similar items in EconPapers)
JEL-codes: D02 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mic
Date: 2018-01-31
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Working Paper: Time-Consistently Undominated Policies (2018) Downloads
Working Paper: Time-Consistently Undominated Policies (2018) Downloads
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