When discretion is better: Initial conditions and the timeless perspective

Stephan Sauer

Economics Letters, 2010, vol. 107, issue 2, 128-130

Abstract: According to Woodford (1999) and (2003) [Woodford, Michael, 1999. Commentary: how should monetary policy be conducted in an era of price stability? In: New challenges for monetary policy. Federal Reserve Bank of Kansas City, pp. 277-316; Woodford, Michael, 2003. Interest and prices: foundations of a theory of monetary policy. Princeton University Press, Princeton, NJ], optimal monetary policy in the New Keynesian model follows the timeless perspective rule. We show why an economy that is sufficiently far away from its steady-state suffers from a short-run cost associated with the timeless perspective. In this case, discretionary policy-making can be better than the timeless perspective policy rule.

Keywords: Optimality; Timeless; perspective; Policy; rules; Initial; conditions (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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