The Time Inconsistency of Optimal Policy
Before the transformation, optimal policy selection was a matter of solving
what the physical scientists called a control problem. This is not surprising, given
that the system-of-equations approach was borrowed from the physical sciences.
With such systems, the principle of optimality holds – that is, it is best to choose
at each point in time policy action that is best given the current situation and
the rules by which policy will be selected in the future. The optimal policy is
time-consistent, and dynamic programming techniques can be used to find
the optimal policy as in the physical sciences. This is true even if there is
uncertainty in the model economyes. This is true even if there is
uncertainty in the model economy