Optimal Discretion

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Optimal Discretion

Author Info

Lengwiler, Yvan
Orphanides, Athanasios

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Abstract

We investigate the desirability of adopting a rule in favor of discretionary monetary policy in a model exhibiting Kydland and Prescott's dynamic inconsistency problem but no fundamental incompatibility between the policymaker's price stability and full employment objectives. We show that if discretion provides a policy flexibility benefit, then a rule is optimal only when inflation exceeds an endogenously determined threshold. This gives rise to a discretionary policy zone for inflation with the central bank taking more drastic action towards stabilizing inflation when inflation veers outside the zone. Imperfect credibility narrows the scope for discretion and enhances the benefits of adopting a rule. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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Article provided by Blackwell Publishing in its journal Scandinavian Journal of Economics.

Volume (Year): 104 (2002)
Issue (Month): 2 (June)
Pages: 261-76
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Handle: RePEc:bla:scandj:v:104:y:2002:i:2:p:261-76

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Paper
- Yvan Lengwiler & Athanasios Orphanides, 1999. "Optimal discretion," Finance and Economics Discussion Series 1999-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Athanasios Orphanides & John C. Williams, 2005. "Inflation scares and forecast-based monetary policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 498-527, April. [Downloadable!] (restricted)
Other versions:
- Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Paper 2003-21, Federal Reserve Bank of Atlanta. [Downloadable!]
- Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Finance and Economics Discussion Series 2003-41, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
- Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Papers in Applied Economic Theory 2003-11, Federal Reserve Bank of San Francisco. [Downloadable!]
- Orphanides, Athanasios & Williams, John C, 2005. "Inflation Scares and Forecast-Based Monetary Policy," CEPR Discussion Papers 4844, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Athanasios Orphanides, 2000. "The quest for prosperity without inflation," Working Paper Series 15, European Central Bank. [Downloadable!]
Other versions:
- Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
- Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April. [Downloadable!] (restricted)
Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series 2002-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Other versions:
- Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Working Papers in Applied Economic Theory 2002-04, Federal Reserve Bank of San Francisco. [Downloadable!]
- Athanasios Orphanides & John C. Williams, 2003. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," CFS Working Paper Series 2003/40, Center for Financial Studies. [Downloadable!]
- Athanasios Orphanides & John C. Williams, 2003. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Working Papers 9884, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, pages 201-246 National Bureau of Economic Research, Inc. [Downloadable!]

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