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USEFULNESS OF THE CONSTRAINED PLANNING PROBLEM IN A MODEL OF MONEY

Published online by Cambridge University Press:  01 September 2008

Joydeep Bhattacharya
Affiliation:
Iowa State University
Rajesh Singh*
Affiliation:
Iowa State University
*
Address correspondence to: Professor Rajesh Singh, Department of Economics, Iowa State University, 260 Heady Hall, Ames, IA 50011, USA; e-mail: rsingh@iastate.edu.

Abstract

In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations generated by these policies. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is potentially an extremely “efficient” (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.

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Articles
Copyright
Copyright © Cambridge University Press 2008

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References

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USEFULNESS OF THE CONSTRAINED PLANNING PROBLEM IN A MODEL OF MONEY
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