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Rules vs. Discretion Under Computability Constraints

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  • Koppl, Roger

Abstract

I describe a class of models for monetary policy in which rationality is bounded by the requirement of algorithmic computability. Essentially, I add a computability constraint to the canonical model of Barro and Gordon (1983b). Discretionary policy increases uncertainty for the public and makes it difficult for the policymaker to anticipate the public’s reactions to policy. With discretionary policy and computability-constrained agents the public and the policymaker are unable to outguess one another, and there is no rational procedure that ensures the convergence of expectations. When the policymaker follows a rule, however, expectations converge and uncertainty is reduced for both the public and the policymaker.

Suggested Citation

  • Koppl, Roger, 2017. "Rules vs. Discretion Under Computability Constraints," Review of Behavioral Economics, now publishers, vol. 4(1), pages 1-31, April.
    • Handle: RePEc:now:jnlrbe:105.00000056
    DOI: 10.1561/105.00000056
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    Cited by:

    1. Mohammed Saiful Islam & Mohammad T. Uddin, 2020. "Interest Rate Interactions between Bangladesh and the US: Possible Pass Through From the US," International Business Research, Canadian Center of Science and Education, vol. 13(7), pages 1-1, July.

    More about this item

    Keywords

    Rules vs. discretion; Monetary policy; Computability; Bounded rationality;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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