TY  - JOUR
AU  - Buiter,Willem H.
TI  - Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models
JF  - National Bureau of Economic Research Technical Working Paper Series
VL  - No. 29
PY  - 1983
Y2  - August 1983
UR  - http://www.nber.org/papers/t0029
L1  - http://www.nber.org/papers/t0029.pdf
N1  - Author contact info:
Willem H. Buiter
Citigroup Centre
Canada Square, Canary Wharf
London E14 5LB
UNITED KINGDOM
E-Mail: willembuiter@btinternet.com
AB  - In this note the method of Hamiltonian dynamics is used to characterize the time-consistent solution to the optimal control problem in a deterministic continuous time rational expectations model. A linear quadratic example based on the work of Miller and Salmon is used for simplicity. To derive the time-consistent rational expectations (or subgame-perfect) solution we first characterize the optimal solution made familiar e.g. through the work of Calvo. The time-consistent solution is then obtained by modifying the optimal solution through the requirement that the co-state variables (shadow prices) of the non-predetermined variables be zero at each instant. Existing solution methods and computational algorithms can be used to obtain the behaviour of the system under optimal policy and under time-consistent policy.
ER  -