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When is Discretion Superior to Timeless Perspective Policymaking?

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  • Richard Dennis

Abstract

The monetary policy literature assumes increasingly that policies are formulated according to the timeless perspective (Woodford, 1999a). However, treating the auxiliary state variables that characterize the timeless perspective equilibrium appropriately 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.

Suggested Citation

  • Richard Dennis, 2010. "When is Discretion Superior to Timeless Perspective Policymaking?," Working Paper Series 2008-21, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2008-21
    DOI: 10.24148/wp2008-21
    Note: Original paper published 2008, under original title- Timeless perspective policymaking: When is discretion superior?
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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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