Timeless perspective versus discretionary policymaking when the degree of inflation persistence is unknown

Juan Paez-Farrell

Economic Modelling, 2011, vol. 28, issue 6, 2432-2438

Abstract: One major strand in optimal monetary policy analysis considers the robustness of alternative policies under model uncertainty. Another has focused on the appropriate perspective for optimal monetary policy, namely discretion or the timeless perspective (TP). The paper bridges these two parallel lines of research by assessing the welfare consequences of both policy perspectives in the presence of misperceptions about the degree of intrinsic inflation persistence. Contrary to most standard results, discretion can be the more robust perspective, the reason being that the TP exploits the expectations channel. With misperceptions this leads to large deteriorations in welfare.

Keywords: Discretion; Timeless perspective; Inflation persistence; Uncertainty; Parameter misperceptions (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:6:p:2432-2438

DOI: 10.1016/j.econmod.2011.06.017

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