Dynamic optimal taxation, rational expectations and optimal control

Finn E. Kydland, Edward Prescott

Research output: Contribution to journalArticle

134 Citations (Scopus)

Abstract

Within a rational expectations framework, policy has effect if it alters relative prices and policy evaluations are exercises in modern public finance theory. The time inconsistency of an optimal taxation plan precludes the use of standard control theory for its determination. In this article recursive methods are developed that overcome this difficulty. The technique is novel in that the constraint set as well as the value function are determined recursively. Even though there is little hope of the optimal plan being implemented - because of its time inconsistency - we think the exercise is of more than pedagogical interest. The optimal plan's return is a benchmark with which to compare the time consistent solution under alternative institutional constraints which society might choose to impose upon itself.

Original languageEnglish (US)
Pages (from-to)79-91
Number of pages13
JournalJournal of Economic Dynamics and Control
Volume2
Issue number1
StatePublished - Feb 1980
Externally publishedYes

Fingerprint

Rational Expectations
Taxation
Finance
Control theory
Optimal Control
Inconsistency
Exercise
Recursive Method
Control Theory
Value Function
Choose
Benchmark
Alternatives
Evaluation
Optimal taxation
Rational expectations
Optimal control
Time inconsistency
Policy
Public finance

ASJC Scopus subject areas

  • Control and Optimization
  • Economics and Econometrics

Cite this

Dynamic optimal taxation, rational expectations and optimal control. / Kydland, Finn E.; Prescott, Edward.

In: Journal of Economic Dynamics and Control, Vol. 2, No. 1, 02.1980, p. 79-91.

Research output: Contribution to journalArticle

@article{6df8b285a28b4930af898034f31ace56,
title = "Dynamic optimal taxation, rational expectations and optimal control",
abstract = "Within a rational expectations framework, policy has effect if it alters relative prices and policy evaluations are exercises in modern public finance theory. The time inconsistency of an optimal taxation plan precludes the use of standard control theory for its determination. In this article recursive methods are developed that overcome this difficulty. The technique is novel in that the constraint set as well as the value function are determined recursively. Even though there is little hope of the optimal plan being implemented - because of its time inconsistency - we think the exercise is of more than pedagogical interest. The optimal plan's return is a benchmark with which to compare the time consistent solution under alternative institutional constraints which society might choose to impose upon itself.",
author = "Kydland, {Finn E.} and Edward Prescott",
year = "1980",
month = "2",
language = "English (US)",
volume = "2",
pages = "79--91",
journal = "Journal of Economic Dynamics and Control",
issn = "0165-1889",
publisher = "Elsevier",
number = "1",

}

TY - JOUR

T1 - Dynamic optimal taxation, rational expectations and optimal control

AU - Kydland, Finn E.

AU - Prescott, Edward

PY - 1980/2

Y1 - 1980/2

N2 - Within a rational expectations framework, policy has effect if it alters relative prices and policy evaluations are exercises in modern public finance theory. The time inconsistency of an optimal taxation plan precludes the use of standard control theory for its determination. In this article recursive methods are developed that overcome this difficulty. The technique is novel in that the constraint set as well as the value function are determined recursively. Even though there is little hope of the optimal plan being implemented - because of its time inconsistency - we think the exercise is of more than pedagogical interest. The optimal plan's return is a benchmark with which to compare the time consistent solution under alternative institutional constraints which society might choose to impose upon itself.

AB - Within a rational expectations framework, policy has effect if it alters relative prices and policy evaluations are exercises in modern public finance theory. The time inconsistency of an optimal taxation plan precludes the use of standard control theory for its determination. In this article recursive methods are developed that overcome this difficulty. The technique is novel in that the constraint set as well as the value function are determined recursively. Even though there is little hope of the optimal plan being implemented - because of its time inconsistency - we think the exercise is of more than pedagogical interest. The optimal plan's return is a benchmark with which to compare the time consistent solution under alternative institutional constraints which society might choose to impose upon itself.

UR - http://www.scopus.com/inward/record.url?scp=0003026996&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0003026996&partnerID=8YFLogxK

M3 - Article

AN - SCOPUS:0003026996

VL - 2

SP - 79

EP - 91

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 1

ER -