Computing time-consistent equilibria: a perturbation approach

Dennis, R. (2022) Computing time-consistent equilibria: a perturbation approach. Journal of Economic Dynamics and Control, 137, 104349. (doi: 10.1016/j.jedc.2022.104349)

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Time-consistency is a key feature of many important policy problems, such as those relating to optimal fiscal policy, optimal monetary policy, macro-prudential policy, and sovereign lending. It is also important for private-sector decision-making through mechanisms such as quasi-geometric discounting. These problems are generally solved using some form of projection method. The difficulty with projection methods is that their computational complexity increases rapidly with the number of state variables, limiting the sophistication of the models that can be solved. This paper develops a perturbation method for solving models with time-inconsistency. The method operates on a model’s (generalized) Euler equations; it does not require forming a quadratic approximation to household welfare and it does not require that the model’s steady state be efficient. We illustrate the method and its applicability to different environments by applying it to a range of models featuring time-inconsistency.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Dennis, Professor Richard
Authors: Dennis, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Economic Dynamics and Control
ISSN (Online):1879-1743
Published Online:01 March 2022
Copyright Holders:Copyright © 2022 The Author
First Published:First published in Journal of Economic Dynamics and Control 137: 10349
Publisher Policy:Reproduced under a Creative Commons License

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