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The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment

  • Christian Jensen
  • Bennett C. McCallum

Several recent papers have usefully emphasized the inefficiency that arises from discretionary monetary policymaking, relative to optimal policy from a 'timeless perspective,' in macroeconomic models with forward-looking private behavior. The inefficiency in question is in terms of average outcomes of the conditional expectation of a policy objective that reflects the discounted present value of current and future period losses (which involve squared deviations of inflation and output from specified target levels). In the literature, most of the analysis has been conducted in an optimizing model that features a Calvo-Rotemberg price adjustment equation that includes a 'cost-push' shock term. This literature suggests that policy, which keeps inflation equal to a negative multiple of the change in the output gap, is optimal with respect to the criterion mentioned above -- the unconditional expectation of the policymaker's objective function. Results reported here show, however, that this is not the case -- that an alternative policy rule, suggested by the approach of 'policy design' rather than by 'optimal control,' delivers superior results.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8882.

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Date of creation: Apr 2002
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Publication status: published as Jensen, Christian and Bennett T. McCallum. "The Non-Optimality Of Proposed Monetary Policy Rules Under Timeless Perspective Commitment," Economics Letters, 2002, v77(2,Oct), 163-168.
Handle: RePEc:nbr:nberwo:8882
Note: EFG ME
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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  2. n/a, 2001. "A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 154, National Institute of Economic and Social Research.
  3. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  4. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
  5. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
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  14. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?: A rejoinder," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 101-102, January.
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  18. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
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