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Sustainable Plans

Working Paper 377 | Published February 1, 1989

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Patrick J. Kehoe Monetary Advisor
V. V. Chari Consultant
Sustainable Plans


We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential rationality conditions for the government and for private agent3. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's (1980) model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

Published in _Journal of Political Economy_ (Vol. 98, No. 4, August 1990, pp. 783-802),