TITLE:
Discretion Rather Than Rules: Ramsey Policy as the Unique Outcome
AUTHORS:
Chihiro Morooka
KEYWORDS:
Macroeconomic Dynamics, Inflation Targeting, Time Consistency, Ramsey Policy, Alternately Repeated Games, Anti-Folk Theorem
JOURNAL NAME:
Theoretical Economics Letters,
Vol.10 No.6,
November
30,
2020
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.