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Discounted Linear Exponential Quadratic Gaussian Control

In: UNCERTAINTY WITHIN ECONOMIC MODELS

Author

Listed:
  • Lars Peter Hansen
  • Thomas J Sargent

Abstract

This chapter formulates a version of a discounted Gaussian optimal linear regulator in which the return function is modified as suggested in Jacobson (1973), Jacobson (1977), Whittle (1981), Whittle (1989a), and Whittle (1990) to incorporate a risk adjustment. In Jacobson (1973), the problem is formulated for the undiscounted case. Contributions Bouakiz and Sobel (1985) and Whittle (1990) described how recursions on a Riccati difference equation apply to a discounted version of the problem. In their formulation with discounting, the optimal decision rules fail to be time-invariant: over time the effects of the risk-parameter “wear off,” and the decision rules eventually converge to what would prevail in the usual linear-quadratic case…

Suggested Citation

  • Lars Peter Hansen & Thomas J Sargent, 2014. "Discounted Linear Exponential Quadratic Gaussian Control," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 2, pages 23-32, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814578127_0002
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