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Should central bankers discount the future? A note

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  • Paez-Farrell, Juan

Abstract

Optimal monetary policy under discretion is analysed in a New Keynesian model with rule of thumb pricing. The paper finds that social welfare increases if the policy maker does not discount the future. The welfare improvement rises with the extent of intrinsic inflation persistence.

Suggested Citation

  • Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
  • Handle: RePEc:eee:ecolet:v:114:y:2012:i:1:p:20-22 DOI: 10.1016/j.econlet.2011.08.019
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    References listed on IDEAS

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    1. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, pages 1661-1707.
    3. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
    4. Jeffrey C. Fuhrer, 2006. "Intrinsic and Inherited Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    5. Gregory E. Givens, 2012. "Estimating Central Bank Preferences under Commitment and Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1033-1061, September.
    6. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October.
    7. Stephan Sauer, 2010. "Discretion Rather Than Rules? When Is Discretionary Policymaking Better Than the Timeless Perspective?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 1-29, June.
    8. Tatiana Kirsanova & Stephanus le Roux, 2011. "Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions," Discussion Papers 1108, Exeter University, Department of Economics.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Tillmann, Peter, 2012. "Cross-checking optimal monetary policy with information from the Taylor rule," Economics Letters, Elsevier, vol. 117(1), pages 204-207.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, pages 1661-1707.

    More about this item

    Keywords

    Optimal monetary policy; Discretion; Rule of thumb; Discount factor;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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