A Graphical Exposition of the Inconsistency of Optimal Monetary Plans

Frank G. Steindl

The Journal of Economic Education, 2006, vol. 37, issue 3, 340-347

Abstract: Abstract: The author presents a geometrical framework in which the inability of discretionary policy (consistent policy in the sense of Kydland and Prescott) to be socially optimal is demonstrated. Policy based on a rule results in a higher level of utility. The author extends the model to demonstrate that policy of a Rogoff conservative central banker results in approaching the same equilibrium as that from a monetary rule. Finally, the framework shows that attempts to exploit the Phillips curve result in stagflation.

Date: 2006
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DOI: 10.3200/JECE.37.3.340-347

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