Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models

Bennett McCallum () and Edward Nelson ()

No 2752, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as recently formalized by Woodford (1999b). In models with forward-looking expectations there is typically a second inefficiency from discretionary policymaking, besides the inflationary bias. The Paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two prominent types; it examines the distinction between instrument rules and targeting rules; and briefly investigates operationality issues involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output is used by the policymaker.

Keywords: Discretion; Expectations; Policymaking; Rules (search for similar items in EconPapers)
JEL-codes: E30 E52 E58 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models (2000)
Journal Article: Timeless perspective vs. discretionary monetary policy in forward-looking models (2004)
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