Discretion rather than rules? When is discretionary policy-making better than the timeless perspective?

Stephan Sauer

No 717, Working Paper Series from European Central Bank

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 favour 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 policy makers for output stabilisation and a deviation from the steady state all worsen the performance of the timeless perspective rule and can make it inferior to discretion. JEL Classification: E5

Keywords: Optimality; Policy rules.; Timeless perspective (search for similar items in EconPapers)
Date: 2007-01
Note: 362683
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp717.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007717

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().