Since the contribution of Kydland and Prescott (1977), it is well known that the optimal Ramsey policy is time inconsistent. In a series of recent contributions, Woodford (2003) proposes a new methodology to circumvent this problem, namely the timeless perspective solution.
Staff working papers
We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem.
The Implications of Transmission and Information Lags for the Stabilization Bias and Optimal DelegationIn two recent papers, Jensen (2002) and Walsh (2003), using a hybrid New Keynesian model, demonstrate that a regime that targets either nominal income growth or the change in the output gap can effectively replicate the outcome under commitment and hence reduce the size of the stabilization bias.
The authors examine the evidence presented by Galí and Gertler (1999) and Galí, Gertler, and Lopez-Salido (2001, 2003) that the inflation dynamics in the United States can be well-described by the New Keynesian Phillips curve (NKPC).
Using French data on industrial firms over the period 1989-2001, the authors estimate a "flexible" Translog production function that accounts for the volumes and durations of factor utilization.
The authors analyze the dynamics of national saving–investment relationships to determine the degree of international capital mobility.
In an overlapping-generations model that represents a small open economy, where agents live two periods, liquidity constraints lead to low economic development when the only accumulable factor is human capital.