Computing Time-Consistent Equilibria: A Perturbation Approach

Time-consistency is a key feature of many important policy problems, such as those relating to optimal fiscal and monetary policy. It also for private-sector decision-making through mechanisms quasi-hyperbolic discounting. These problems are generally solved using some form projection method. The difficultly with methods that their computational complexity increases rapidly the number state variables, limiting sophistication models can be solved. This paper develops perturbation method solving time-inconsistency enables larger more readily analyzed. operates on model’s (generalized) Euler equations; it does not require forming quadratic approximation household welfare steady efficient. We apply several featuring show exhibits good accuracy.