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Should Rules Be Simple?

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  • Levine, Paul

Abstract

The principal argument of the paper is that in an incomplete information setting, where the, private sector lacks information of government objectives and has to learn about the policy, rule by direct observation and estimation, simple "sub-optimal" rules may outperform the more complicated rule which is optimal under complete information. This result is demonstrated by simulations using an overlapping contract rational expectations model. The paper thus provides some formal reasoning to support arguments for simplicity associated with credibility and the need for the private sector to be able to monitor policy. Copyright 1992 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Economics of Planning.

Volume (Year): 25 (1992)
Issue (Month): 2 ()
Pages: 113-38

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Handle: RePEc:kap:ecopln:v:25:y:1992:i:2:p:113-38

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Web page: http://www.springerlink.com/link.asp?id=113294

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Cited by:
  1. Svensson, Lars E O, 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," CEPR Discussion Papers 2196, C.E.P.R. Discussion Papers.
  2. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  3. Tetlow, Robert J. & von zur Muehlen, Peter, 2001. "Simplicity versus optimality: The choice of monetary policy rules when agents must learn," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 245-279, January.
  4. Levine, Paul & Pearlman, Joseph, 2010. "Robust monetary rules under unstructured model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 456-471, March.
  5. Andrew G Haldane, 1995. "Rules, Discretion and the United Kingdom's New Monetary Framework," Bank of England working papers 40, Bank of England.

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