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Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models

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  • McCallum, Bennett T
  • Nelson, Edward

Abstract

This Paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as recently formalized by Woodford (1999b). In models with forward-looking expectations there is typically a second inefficiency from discretionary policymaking, besides the inflationary bias. The Paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two prominent types; it examines the distinction between instrument rules and targeting rules; and briefly investigates operationality issues involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output is used by the policymaker.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2752.

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Date of creation: Mar 2001
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Handle: RePEc:cpr:ceprdp:2752

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Keywords: Discretion; Expectations; Policymaking; Rules;

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References

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