This paper proposes and characterises a new normative solution concept for Kydland and
Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an
alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b)
an alternative exists that Pareto-dominates it over time. Policies may be time-consistently
undominated where time-consistent optimality is not possible. We derive necessary and sufficient
conditions for this ...
This paper proposes and characterises a new normative solution concept for Kydland and
Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an
alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b)
an alternative exists that Pareto-dominates it over time. Policies may be time-consistently
undominated where time-consistent optimality is not possible. We derive necessary and sufficient
conditions for this to be true, and show that these are equivalent to a straightforward but significant
change to the first-order conditions that apply under Ramsey policy. Time-consistently
undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining
normative appeal. This is illustrated across a range of examples.
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