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Timeless Perspective Policymaking: When is Discretion Superior?

Listed author(s):
  • Richard Dennis

    ()

    (Federal Reserve Bank of San Francisco)

In this paper I show that discretionary policymaking can be superior to timeless perspective policymaking and identify model features that make this outcome more likely. Developing a measure of conditional loss that treats the auxiliary state variables that characterize the timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to show that discretion can dominate timeless perspective policymaking when the Phillips curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal price rigidity. 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.

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File URL: http://www.ncer.edu.au/papers/documents/NCER_WpNo38Jan09.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 38.

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Length: 29
Date of creation: 20 Jan 2009
Handle: RePEc:qut:auncer:2009_38
Contact details of provider: Phone: 07 3138 5066
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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  4. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2007. "Unconditionally Optimal Monetary Policy," CDMA Working Paper Series 200721, Centre for Dynamic Macroeconomic Analysis.
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  7. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2004. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Econometric Society 2004 North American Winter Meetings 411, Econometric Society.
  8. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
  9. Robert J. Tetlow & Peter von zur Muehlen, 1999. "Simplicity versus optimality the choice of monetary policy rules when agents must learn," Finance and Economics Discussion Series 1999-10, Board of Governors of the Federal Reserve System (U.S.).
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  11. Michel Juillard & Florian Pelgrin, 2007. "Computing Optimal Policy in a Timeless-Perspective: An Application to a Small-Open Economy," Staff Working Papers 07-32, Bank of Canada.
  12. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  13. Eichenbaum, Martin & Fisher, Jonas D.M., 2007. "Estimating the frequency of price re-optimization in Calvo-style models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2032-2047, October.
  14. Blake, Andrew P., 2002. "A 'Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models," Royal Economic Society Annual Conference 2002 30, Royal Economic Society.
  15. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
  16. Levin, Andrew T. & David López-Salido, J. & Nelson, Edward & Yun, Tack, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 48-62, October.
  17. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  18. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, December.
  19. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics.
  20. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
  21. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
  22. Richard Dennis, 2003. "Inferring policy objectives from economic outcomes," Working Paper Series 2003-05, Federal Reserve Bank of San Francisco.
  23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
  24. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May.
  25. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
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