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When is discretion superior to timeless perspective policymaking?

  • Dennis, Richard

The monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective (Woodford, 1999a). However, by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance, this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely. Using standard New Keynesian DSGE models, discretion is found to dominate timeless perspective policymaking when the price/wage Phillips curves are relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal rigidities. 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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 3 (April)
Pages: 266-277

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Handle: RePEc:eee:moneco:v:57:y:2010:i:3:p:266-277
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. 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 473-91, June.
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