CREDIBLE PUBLIC-POLICY

Credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame-perfect Nash equilibrium behavior for the government. It is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of Abreu (1988) for repeated games. The results are then extended to systems with state variables. Simple models of monetary policy and capital taxation are studied by way of example. © 1991.