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When discretion is better: Initial conditions and the timeless perspective

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  • Sauer, Stephan
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    Abstract

    According to Woodford (1999) and (2003) [Woodford, Michael, 1999. Commentary: how should monetary policy be conducted in an era of price stability? In: New challenges for monetary policy. Federal Reserve Bank of Kansas City, pp. 277-316; Woodford, Michael, 2003. Interest and prices: foundations of a theory of monetary policy. Princeton University Press, Princeton, NJ], optimal monetary policy in the New Keynesian model follows the timeless perspective rule. We show why an economy that is sufficiently far away from its steady-state suffers from a short-run cost associated with the timeless perspective. In this case, discretionary policy-making can be better than the timeless perspective policy rule.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 107 (2010)
    Issue (Month): 2 (May)
    Pages: 128-130

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    Handle: RePEc:eee:ecolet:v:107:y:2010:i:2:p:128-130

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    Web page: http://www.elsevier.com/locate/ecolet

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    Keywords: Optimality Timeless perspective Policy rules Initial conditions;

    References

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    1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    2. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
    5. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2752, C.E.P.R. Discussion Papers.
    6. Christian Jensen & Bennett C. McCallum, 2002. "The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment," NBER Working Papers 8882, National Bureau of Economic Research, Inc.
    7. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 491-500, April.
    8. Sauer, Stephan, 2007. "Frameworks for the Theoretical and Empirical Analysis of Monetary Policy," Munich Dissertations in Economics 7179, University of Munich, Department of Economics.
    9. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
    10. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    11. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 277-316.
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    Cited by:
    1. Petrella, Ivan & Rossi, Raffaele & Santoro, Emiliano, 2014. "Discretion vs. timeless perspective under model-consistent stabilization objectives," Economics Letters, Elsevier, Elsevier, vol. 122(1), pages 84-88.

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