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The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations

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  • Willem H. Buiter

Abstract

The paper investigates the robustness of the proposition that in stochastic models contingent or feddback rules dominate fiped or openloop rules. Four arguments in favour of fixed rules are considere`. 1) The presence of an incompetent op malevolent policy maker. 2) A trade-off between flexibility and simplicity or credibility. 3) The New Classical proposition that only unanticipated (stabilization) policy has real effects. 4) The "time-inconsistency" of optimal plans in non-causal models, that is models in which the current state of the economy depends on expectations of future states. The main conclusion is that the "rational expectations revolution", represented by arguments (3) and (4) does not affect the potential superiority of (time-inconsistent) closed-loop policies over (time-inconsistent) open-loop policies. The case against conditionality in the design of policy must therefore rest on argument (1) or (2) which predate the New Classical Macroeconomics.

Suggested Citation

  • Willem H. Buiter, 1981. "The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations," NBER Technical Working Papers 0009, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberte:0009 Note: ITI IFM
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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    Cited by:

    1. Reinhard Neck, 1986. "Kann Stabilisierungspolitik unter Unsicherheit und Risiko "optimal" sein?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 122(III), pages 509-534, September.
    2. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance; A Survey of Boards and Management," IMF Working Papers 04/226, International Monetary Fund.
    3. Willem H. Buiter, 2003. "James Tobin: An Appreciation of his Contribution to Economics," Economic Journal, Royal Economic Society, vol. 113(491), pages 585-631, November.
    4. Jean-Claude Trichet, 2009. "Credible alertness revisited," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 437-460.
    5. William Roberds, 1986. "Solution of linear-quadratic- Gaussian dynamic games using variational methods," Staff Report 105, Federal Reserve Bank of Minneapolis.
    6. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, pages 497-520.
    7. repec:spr:scient:v:85:y:2010:i:1:d:10.1007_s11192-010-0237-1 is not listed on IDEAS
    8. Levine, Paul & Currie, David, 1985. "Optimal feedback rules in an open economy macromodel with rational expectations," European Economic Review, Elsevier, vol. 27(2), pages 141-163, March.
    9. van der Ploeg, F, 1990. "Capital Accumulation, Inflation and Long-run Conflict in International Objectives," Oxford Economic Papers, Oxford University Press, pages 501-525.
    10. Buiter, Willem H. & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers.
    11. Kenneth S. Rogoff, 1983. "Productive and counterproductive cooperative monetary policies," International Finance Discussion Papers 233, Board of Governors of the Federal Reserve System (U.S.).
    12. Roberds, William, 1987. "Models of Policy under Stochastic Replanning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 731-755, October.
    13. Willem H. Buiter, 1982. "Comment on T. J. Sargent and N. Wallace: "Some Unpleasant Monetarist Arithmetic"," NBER Working Papers 0867, National Bureau of Economic Research, Inc.
    14. Michener, Ron, 1998. "Inflation, Expectations, and Output: Lucas's Islands Revisited," Journal of Macroeconomics, Elsevier, pages 767-783.
    15. Bali, Turan G. & Thurston, Thom B., 2002. "On the efficiency of monetary policy rules with flexible prices and rational expectations," Journal of Economics and Business, Elsevier, pages 615-631.
    16. Frans Bal & Peter Nijkamp, 1997. "Exogenous and Endogenous Spatial Growth Models," Tinbergen Institute Discussion Papers 97-022/3, Tinbergen Institute.
    17. Perlman, Mark, 1988. "The fundamental issues in the controversy of the policy paradigms: Policies, theories, and underpinnings," Kiel Working Papers 305, Kiel Institute for the World Economy (IfW).
    18. Peter von zur Muehlen, 2001. "Activist vs. non-activist monetary policy: optimal rules under extreme uncertainty," Finance and Economics Discussion Series 2001-02, Board of Governors of the Federal Reserve System (U.S.).
    19. Willem H. Buiter, 1983. "The Theory of Optimum Deficits and Debt," NBER Working Papers 1232, National Bureau of Economic Research, Inc.
    20. Willem H. Buiter & Marcus H. Miller, 1983. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues," NBER Working Papers 1252, National Bureau of Economic Research, Inc.
    21. Edward Kutsoati, 2000. "Debt-Contingent Inflation Contracts and Targeting," Discussion Papers Series, Department of Economics, Tufts University 0009, Department of Economics, Tufts University.
    22. Jörg Bibow, 2001. "Reflections on the Current Fashion For Central Bank Independence," Macroeconomics 0108004, EconWPA.

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