The Consistency of Optimal Policy in Stochastic Rational Expectations Models
Stern School of Business, New York University
Department of Economics, Birkbeck College
This paper extends the work of Barro and Gordon (1983) to a wider class of economic models and obtains results for general linear dynamic rational expectations models which may have additive shocks. We use the framework of dynamic games played over an infinite horizon. By contrast with our earlier work on macreoconomic policy (Backus and Driffill, 1985a and b) we here assume that the objectives of all the players in the game are common knowledge.