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Discretion Rather Than Rules: Ramsey Policy as the Unique Outcome
Faculty of Economics, The University of Tokyo, Tokyo, Japan
- 1 Faculty of Economics, The University of Tokyo, Tokyo, Japan
Theoretical Economics Letters·Volume 10 (2020)·Pages 1199–1204·Published 27 November 2020·DOI10.4236/tel.2020.106071
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Abstract
This paper analyzes finitely repeated policy games where the government and the private sector alternately revise their actions from the set of non-negative real numbers. Unlike previous studies on policy games, the one-shot inefficient Nash equilibrium, known as the Kydland-Prescott outcome, is avoided and only the optimal Ramsey outcome is established in subgame perfect equilibria. Therefore, the Ramsey policy is time-consistent in our model, whereas the Kydland-Prescott outcome is not.
KeywordsMacroeconomic DynamicsInflation TargetingTime ConsistencyRamsey PolicyAlternately Repeated GamesAnti-Folk Theorem
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