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Should Rules Be Simple?

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  • Levine, Paul

Abstract

The principal argument of the paper is that in an incomplete information setting, where the, private sector lacks information of government objectives and has to learn about the policy, rule by direct observation and estimation, simple "sub-optimal" rules may outperform the more complicated rule which is optimal under complete information. This result is demonstrated by simulations using an overlapping contract rational expectations model. The paper thus provides some formal reasoning to support arguments for simplicity associated with credibility and the need for the private sector to be able to monitor policy. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Levine, Paul, 1992. "Should Rules Be Simple?," Economic Change and Restructuring, Springer, vol. 25(2), pages 113-138.
  • Handle: RePEc:kap:ecopln:v:25:y:1992:i:2:p:113-38
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    Cited by:

    1. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
    2. Svensson, Lars E O, 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," CEPR Discussion Papers 2196, C.E.P.R. Discussion Papers.
    3. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
    4. Tetlow, Robert J. & von zur Muehlen, Peter, 2001. "Simplicity versus optimality: The choice of monetary policy rules when agents must learn," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 245-279, January.
    5. Andrew G Haldane, 1995. "Rules, Discretion and the United Kingdom's New Monetary Framework," Bank of England working papers 40, Bank of England.
    6. Levine, Paul & Pearlman, Joseph, 2010. "Robust monetary rules under unstructured model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 456-471, March.
    7. Floden, Martin, 2000. "Endogenous monetary policy and the business cycle," European Economic Review, Elsevier, vol. 44(8), pages 1409-1429, August.

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