Problems of macroeconomic stabilization policies have been analyzed by means of optimal control theory since the early seventies [see, for example, Kendrick (1981)]. However, with the emergence of the New Classical Macroeconomics, this theoretical framework has been increasingly questioned. In particular, Kydland’s and Prescott’s (1977) claim that government’s stabilization policies derived by optimum control methods might be time-inconsistent when private-sector agents have rational expectations of policy-makers’ behaviour has been regarded as a serious argument against the use of optimum control theory in macroeconomics, although the real-world importance of time-inconsistent behaviour is still controversial. [For an early theoretical critique, see Hughes Hallett (1986a); for empirical analyses, Ireland (1999), Boschen and Weise (2004), among others.] Later research on time-inconsistency indicates that dynamic game theory is a more appropriate tool for analyzing stabilization policy problems because more than one decision-maker has to be considered explicitly. Therefore over the last three decades, a large number of studies of macroeconomic stabilization policies (as well as of other areas in economics) have made use of the concepts and results of the theory of dynamic games.
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- Time Consistency, Subgame Perfectness, Solution Concepts and Information Patterns in Dynamic Models of Stabilization Policies
Engelbert J. Dockner
- Springer Berlin Heidelberg
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