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Timeless Perspective Policymaking: When is Discretion Superior?

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  • Richard Dennis

    ()
    (Federal Reserve Bank of San Francisco)

Abstract

In this paper I show that discretionary policymaking can be superior to timeless perspective policymaking and identify model features that make this outcome more likely. Developing a measure of conditional loss that treats the auxiliary state variables that characterize the timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to show that discretion can dominate timeless perspective policymaking when the Phillips curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal price rigidity. These results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion, paying careful attention to how policy performance is evaluated.

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Bibliographic Info

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 38.

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Length: 29
Date of creation: 20 Jan 2009
Date of revision:
Handle: RePEc:qut:auncer:2009_38

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Keywords: Discretion; timeless perspective; policy evaluation.;

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  17. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
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Cited by:
  1. Lars E.O. Svensson, 2010. "Inflation Targeting," NBER Working Papers 16654, National Bureau of Economic Research, Inc.
  2. 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.

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