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The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations

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  • Willem H. Buiter

Abstract

The paper investigates the robustness of the proposition that in stochastic models contingent or feddback rules dominate fiped or openloop rules. Four arguments in favour of fixed rules are considere`. 1) The presence of an incompetent op malevolent policy maker. 2) A trade-off between flexibility and simplicity or credibility. 3) The New Classical proposition that only unanticipated (stabilization) policy has real effects. 4) The "time-inconsistency" of optimal plans in non-causal models, that is models in which the current state of the economy depends on expectations of future states. The main conclusion is that the "rational expectations revolution", represented by arguments (3) and (4) does not affect the potential superiority of (time-inconsistent) closed-loop policies over (time-inconsistent) open-loop policies. The case against conditionality in the design of policy must therefore rest on argument (1) or (2) which predate the New Classical Macroeconomics.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0009.

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Date of creation: Dec 1981
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Publication status: published as Buiter, Willem H. "The Superiority of Contingent Rules over Fixed Rulds in Models with Rational Expectations." The Economic Journal, Vol. 91, (September 1981), pp. 647-670.
Handle: RePEc:nbr:nberte:0009

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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
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Cited by:
  1. Edward Kutsoati, 2000. "Debt-Contingent Inflation Contracts and Targeting," Discussion Papers Series, Department of Economics, Tufts University 0009, Department of Economics, Tufts University.
  2. Kenneth S. Rogoff, 1983. "Productive and counterproductive cooperative monetary policies," International Finance Discussion Papers 233, Board of Governors of the Federal Reserve System (U.S.).
  3. repec:dgr:uvatin:2097022 is not listed on IDEAS
  4. Willem H. Buiter, 2003. "James Tobin: An Appreciation of his Contribution to Economics," Economic Journal, Royal Economic Society, vol. 113(491), pages F585-F631, November.
  5. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance," IMF Working Papers 04/226, International Monetary Fund.
  6. Haizhou Huang & Peter B Clark & Charles Goodhart, 1996. "Optimal Monetary Policy Rules in a Rational Expectations Model of the Phillips Curve," FMG Discussion Papers dp247, Financial Markets Group.
  7. Reinhard Neck, 1986. "Kann Stabilisierungspolitik unter Unsicherheit und Risiko "optimal" sein?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 122(III), pages 509-534, September.
  8. Roberds, William, 1987. "Models of Policy under Stochastic Replanning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 731-55, October.
  9. Jörg Bibow, 2001. "Reflections on the Current Fashion For Central Bank Independence," Macroeconomics 0108004, EconWPA.
  10. Willem H. Buiter & Marcus H. Miller, 1983. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues," NBER Working Papers 1252, National Bureau of Economic Research, Inc.
  11. Perlman, Mark, 1988. "The fundamental issues in the controversy of the policy paradigms: Policies, theories, and underpinnings," Kiel Working Papers 305, Kiel Institute for the World Economy.
  12. William Roberds, 1986. "Solution of linear-quadratic- Gaussian dynamic games using variational methods," Staff Report 105, Federal Reserve Bank of Minneapolis.
  13. Peter von zur Muehlen, 2001. "Activist vs. non-activist monetary policy: optimal rules under extreme uncertainty," Finance and Economics Discussion Series 2001-02, Board of Governors of the Federal Reserve System (U.S.).
  14. Buiter, Willem H & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers.
  15. Levine, Paul & Currie, David, 1985. "Optimal feedback rules in an open economy macromodel with rational expectations," European Economic Review, Elsevier, vol. 27(2), pages 141-163, March.
  16. Bali, Turan G. & Thurston, Thom B., 2002. "On the efficiency of monetary policy rules with flexible prices and rational expectations," Journal of Economics and Business, Elsevier, vol. 54(6), pages 615-631.
  17. Frans Bal & Peter Nijkamp, 1997. "Exogenous and Endogenous Spatial Growth Models," Tinbergen Institute Discussion Papers 97-022/3, Tinbergen Institute.
  18. Willem H. Buiter, 1983. "The Theory of Optimum Deficits and Debt," NBER Working Papers 1232, National Bureau of Economic Research, Inc.
  19. Jean-Claude Trichet, 2009. "Credible alertness revisited," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 437-460.
  20. Willem H. Buiter, 1982. "Comment on T. J. Sargent and N. Wallace: "Some Unpleasant Monetarist Arithmetic"," NBER Working Papers 0867, National Bureau of Economic Research, Inc.

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