Discretion Rather Than Rules? When Is Discretionary Policymaking Better Than the Timeless Perspective?
AbstractDiscretionary monetary policy produces a dynamic loss in the New Keynesian model in the presence of cost-push shocks. The possibility to commit to a specific policy rule can increase welfare. A number of authors since Woodford (1999) have argued in favor of a timeless-perspective rule as an optimal policy. The short-run costs associated with the timeless perspective are neglected in general, however. Rigid prices, relatively impatient households, a high preference of policymakers for output stabilization, and a deviation from the steady state all worsen the performance of the timeless-perspective rule and can make it inferior to discretion.
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Bibliographic InfoArticle provided by International Journal of Central Banking in its journal International Journal of Central Banking.
Volume (Year): 6 (2010)
Issue (Month): 2 (June)
Find related papers by JEL classification:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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- Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
- Bask, Mikael & Proaño, Christian R, 2012. "Optimal Monetary Policy under Learning in a New Keynesian Model with Cost Channel and Inflation Inertia," Working Paper Series 2012:7, Uppsala University, Department of Economics.
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