In this paper, we derive the Stackelberg solution associated with a leader–follower rational expectations model. By solving the dynamic rational expectations optimization problem subject to forward and backward stochastic difference equations (FBSDEs), we obtain the Stackelberg strategy of the leader with an adapted open-loop information structure, in terms of the FBSDEs. Furthermore, we solve the associated FBSDEs by establishing a nonhomogeneous relationship between backward and forward stochastic processes. This leads to an explicit form of the Stackelberg strategy of the leader.
- Rational expectations model
- Stackelberg solution
ASJC Scopus subject areas
- Control and Systems Engineering
- Electrical and Electronic Engineering