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Should Rules be Simple?

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Author Info
Levine, Paul L

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Abstract

The principal argument of the paper is that in an incomplete information setting, where the private sector lacks information on goverment objectives and has to learn about the policy rule by direct observation and estimation, simple `sub-optimal' rules may outperform the more complicated rule that 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.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 515.

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Date of creation: Mar 1991
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Handle: RePEc:cpr:ceprdp:515

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Related research
Keywords: Credibility; Learning; Rational Expectations; Simple Rules;

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  1. Svensson, Lars E. O., 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," Working Paper Series 91, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  2. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-25.

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