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Dynamic Optimization in Two-Party Models

McKibbin, Warwick J.; Roubini, Nouriel; Sachs, Jeffrey D.

The goal of this paper is to study the problem of optimal dynamic policy formulation with competing political parties. We study a general class of problems, in which the two competing political parties have quadratic intertemporal objective functions, and in which the economy has a linear structure and a multidimensional state space. For the general linear quadratic problem we develop a numerical dynamic programming algorithm to solve for optimal policies of each party taking into account the party's objectives; the structure of the economy; the probability of future election results; and the objectives of the other political party.

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Publisher
National Bureau of Economic Research
Publication Origin
Cambridge, Mass.
Series
NBER Working Paper, 2213
Academic Units
Earth Institute
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