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The non-optimality of proposed monetary policy rules under timeless perspective commitment

  • Jensen, Christian
  • McCallum, Bennett T.

Several recent papers have usefully emphasized the inefficiency that arises from discretionary monetary policymaking, relative to optimal policy from a 'timeless perspective,' in macroeconomic models with forward-looking private behavior. The inefficiency in question is in terms of average outcomes of the conditional expectation of a policy objective that reflects the discounted present value of current and future period losses (which involve squared deviations of inflation and output from specified target levels). In the literature, most of the analysis has been conducted in an optimizing model that features a Calvo-Rotemberg price adjustment equation that includes a 'cost-push' shock term. This literature suggests that policy, which keeps inflation equal to a negative multiple of the change in the output gap, is optimal with respect to the criterion mentioned above -- the unconditional expectation of the policymaker's objective function. Results reported here show, however, that this is not the case -- that an alternative policy rule, suggested by the approach of 'policy design' rather than by 'optimal control,' delivers superior results.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 77 (2002)
Issue (Month): 2 (October)
Pages: 163-168

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Handle: RePEc:eee:ecolet:v:77:y:2002:i:2:p:163-168
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  2. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?: A rejoinder," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 101-102, January.
  3. Bennett T. McCallum, . "Role of the minimal state variable criterion in rational expectations models," GSIA Working Papers 1999-13, Carnegie Mellon University, Tepper School of Business.
  4. Richard Dennis, 2001. "Pre-commitment, the timeless perspective, and policymaking from behind a veil of uncertainty," Working Paper Series 2001-19, Federal Reserve Bank of San Francisco.
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  10. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
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  18. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  19. Bennett T. McCallum, 2000. "Role of the Minimal State Variable Criterion," NBER Working Papers 7087, National Bureau of Economic Research, Inc.
  20. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  21. 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.
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