Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking

Christian Jensen ()

The B.E. Journal of Macroeconomics, 2020, vol. 20, issue 1, 9

Abstract: Because optimal plans are time-inconsistent, continuing one from a previous period is not optimal from today’s perspective, and may not outperform discretion, even ignoring surprise deviations. Hence, a once-and-for-all commitment to the optimal plan from a particular period does not always outperform discretion over time, even if superior from the perspective of the original period. Forward-looking policymakers might therefore not want to bind themselves to the optimal plan from any period. The vast literature on commitment strategies illustrates that it is a common misconception that a once-and-for-all commitment to the optimal plan is always preferable to discretion.

Keywords: commitment; discretion; expectations; policy rules (search for similar items in EconPapers)
JEL-codes: E52 E61 H30 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/bejm-2018-0035

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