Ramsey Policy vs. Taylor rule

Hello, professors. I have a problem about Ramsey Policy, I run the Ramsey Policy and get this results:

Approximated value of planner objective function
- with initial Lagrange multipliers set to 0: -278.7321
- with initial Lagrange multipliers set to steady state: -278.7449

And I run the baseline model ,and get second order approximation welfare :-278.5189764959624

And my question :is this result right? why the welfare loss in Ramsey is larger than Tayler rule?
ramsey.mod (8.1 KB)
baseline.mod (7.7 KB)

1 Like

It’s hard to tell.

  1. The parameterization is slightly different across files.

  2. You are using inconsistent approximation orders. You are comparing Ramsey at order=1 to a Taylor rule at order=2. This problem will hopefully be fixed soon in Dynare 4.7. Once Fixing the regression in behavior in evaluate_planner_objective (Ref: #1680) (!1923) · Merge requests · Dynare / dynare · GitLab has been merged, the attached file will return:

Approximated value of unconditional welfare: -278.76387262

Approximated value of conditional welfare:
- with initial Lagrange multipliers set to 0: -278.75349865
- with initial Lagrange multipliers set to steady state: -278.76365086

ramsey.mod (8.1 KB)

Unconditional welfare with the Taylor rule is -278.5202

Thank you professor for your reply. Can I interpret this as Ramsey policy does not mean that it is always optimal. And choose Ramsey policy as object of comparison sometimes is inappropriate.

No, fixing the inconsistencies, I get

welfare -278.5210

for the Taylor rule and

Approximated value of unconditional welfare: -278.42457509

for Ramsey. Thus, the latter yields higher welfare.
baseline.mod (7.7 KB)
Ramsey.mod (8.1 KB)

Thanks a lot, professor, I get it.