Discretion vs. Timeless Perspective under Model-consistent Stabilization Objectives

Ivan Petrella, Raffaele Rossi and Emiliano Santoro

No 1306, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretion may be superior to timeless perspective. We show this is unlikely when the policy maker relies on a welfare-theoretic loss function obtained as a second-order approximation of households’utility, even in the presence of features that should enhance the relative performance of discretionary policy-making in the baseline New Keynesian model. This result stands in contrast to the existing studies, whose analysis has typically relied on ad hoc welfare criteria that reject neither households’preferences, nor the degree of rigidity in price-setting.

Date: 2013-09
New Economics Papers: this item is included in nep-mac
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https://eprints.bbk.ac.uk/id/eprint/8637 First version, 2013 (application/pdf)

Related works:
Journal Article: Discretion vs. timeless perspective under model-consistent stabilization objectives (2014)
Working Paper: Discretion vs. Timeless Perspective under Model-consistent Stabilization Objectives (2013)
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