AN ANALYSIS OF THE IMPACT OF FINITE HORIZONS ON MACROECONOMIC CONTROL

Macroeconomic control exercises using large-scale non-linear consisten t expectations models necessarily employ a finite time horizon. By con trast, much of the analytic literature has focused on the linear-quadr atic infinite horizon problem, for which closed form solutions are eas y to derive and offer convenient interpretation. This paper examines t he extent to which the imposed finite time horizon distorts the optima l policy. We compare the effects on the reputational time inconsistent solution with those on time consistent strategies using both a large non-linear consistent expectations model and a compact linearised vers ion.