This paper extends the work of Barro and Gordon (1983) to general linear models with rational expectations. We examine the question whether the optimal policy rule, i.e. the one that a government which could pre-commit itself would use, can be sustained as a consistent rule in the sense defined...

In several recent papers macroeconomic policy has been modelled in the context of a game of incomplete information. A central result of the work by Backus and Driffill and by Barro is that the uncertainty may provide an incentive for the government to maintain a socially efficient policy of zero...

A classical equilibrium model is analysed of two interdependent monetary economies in which it is assumed that cash is the only asset, and which is characterized by perfect foresight, flexible exchange rates and imperfect substitution between home and foreign goods. The first-best optimum sets...

This paper re-examines the issue of the credibility and sustainability of optimal policies derived from Pontryagin's Maximum Principle and generally regarded as time-inconsistent, in models with forward-looking rational expectations. Specifically, it considers the behaviour of such models in the...

Is sovereign debt so different from corporate debt that there is no need for bankruptcy procedures to handle potential defaults? The basic tools of finance seem to confirm that, without water-tight sovereign immunity, creditors face a Prisoner’s Dilemma: litiginous creditors may be tempted to...

The effect of asymmetric information on monetary policy is investigated in the context of an overlapping wage contract model. Optimal rules with and without precommitment under full information are compared with the optimal rule without precommitment (i.e. the discretionary rule) under...

This paper examines the implications for strategic trade policy of different assumptions about precommitment. In a dynamic oligopoly game with learning by doing, the optimal first-period subsidy is lower if firms cannot precommit to future output than if they can; and is lower still if the...

We re-examine optimal monetary policy in a dynamic general equilibrium model where open market operations are the only policy instrument. The government optimizes purely over private agents’ welfare. We use a money-in-the-utility-function approach with a welfare cost of ‘current’...

It has been recognized that the optimal strategy of a government is generally time-inconsistent: optimality requires that the government take into account expectations effects in the formulation of its policy and to ignore these effects when applying the policy. In order to analyse the problem,...

The paper addresses the Kydland and Prescott (1977) argument that the optimal policy in models with rational expectations is time-inconsistent. This, it is argued, undermines the credibility of the optimal policy in the eyes of the private sector, who will expect the policy-maker to reoptimize....