Discretion Rather Than Rules? When Is Discretionary Policymaking Better Than the Timeless Perspective?

Stephan Sauer
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Stephan Sauer: European Central Bank

International Journal of Central Banking, 2010, vol. 6, issue 2, 1-29

Abstract: Discretionary monetary policy produces a dynamic loss in the New Keynesian model in the presence of cost-push shocks. The possibility to commit to a specific policy rule can increase welfare. A number of authors since Woodford (1999) have argued in favor of a timeless-perspective rule as an optimal policy. The short-run costs associated with the timeless perspective are neglected in general, however. Rigid prices, relatively impatient households, a high preference of policymakers for output stabilization, and a deviation from the steady state all worsen the performance of the timeless-perspective rule and can make it inferior to discretion.

JEL-codes: E5 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (11)

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