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What Is the Proper Perspective for Monetary Policy Optimality?

Author

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  • McCallum, Bennett-T

    (Carnegie Mellon U)

Abstract

In forward-looking models for monetary policy analysis, the conditions for full conditional optimality are not time invariant, and as a consequence imply an incentive each period for the central bank to depart from its previous optimized plan. The conditional "commitment" plan is therefore strategically incoherent. Discretionary optimality does not have this problem, but yields inferior performance. A "timeless perspective" policy rule proposed by Woodford (1999, 2003) is intended to overcome the incoherence and noncredibility of the commitment plan while yielding performance superior to that of discretionary policy behavior; this rule has received much attention. A fourth "fully timeless" alternative differs slightly from the timeless perspective rule; it is unambiguously superior from an unconditional perspective but does not dominate from the conditional perspective. The paper discusses comparisons at some length and briefly considers the sustainability of these policy strategies.

Suggested Citation

  • McCallum, Bennett-T, 2005. "What Is the Proper Perspective for Monetary Policy Optimality?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(S1), pages 13-24, October.
    • Handle: RePEc:ime:imemes:v:23:y:2005:i:s1:p:13-24
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me23-s1-3.pdf
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    Citations

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    Cited by:

    1. Evans George W & McGough Bruce, 2010. "Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-25, March.
    2. Kozo Ueda, 2010. "A Time-Invariant Duration Policy under the Zero Lower Bound," IMES Discussion Paper Series 10-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Miguel Casares, 2006. "A close look at model-dependent monetary policy design," Review, Federal Reserve Bank of St. Louis, vol. 88(Sep), pages 451-470.
    4. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2015. "Ordering Policy Rules with an Unconditional Welfare Measure," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 103-149, January.
    5. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2021. "Unconditionally optimal Ramsey policy," Journal of Macroeconomics, Elsevier, vol. 69(C).
    6. Juan Paez-Farrell, 2009. "Timeless perspective vs discretionary policymaking when the degree of inflation persistence is unknown," Discussion Paper Series 2009_14, Department of Economics, Loughborough University, revised Sep 2009.
    7. Paez-Farrell, Juan, 2011. "Timeless perspective versus discretionary policymaking when the degree of inflation persistence is unknown," Economic Modelling, Elsevier, vol. 28(6), pages 2432-2438.
    8. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 491-500, April.
    9. Kazumasa Iwata, 2005. "Monetary policy strategies : a central bank panel," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 507-516.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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