The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations

Willem Buiter

No 9, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper investigates the robustness of the proposition that in stochastic models contingent or feddback rules dominate fiped or openloop rules. Four arguments in favour of fixed rules are considere`. 1) The presence of an incompetent op malevolent policy maker. 2) A trade-off between flexibility and simplicity or credibility. 3) The New Classical proposition that only unanticipated (stabilization) policy has real effects. 4) The "time-inconsistency" of optimal plans in non-causal models, that is models in which the current state of the economy depends on expectations of future states. The main conclusion is that the "rational expectations revolution", represented by arguments (3) and (4) does not affect the potential superiority of (time-inconsistent) closed-loop policies over (time-inconsistent) open-loop policies. The case against conditionality in the design of policy must therefore rest on argument (1) or (2) which predate the New Classical Macroeconomics.

Date: 1981-12
Note: ITI IFM
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Published as Buiter, Willem H. "The Superiority of Contingent Rules over Fixed Rulds in Models with Rational Expectations." The Economic Journal, Vol. 91, (September 1981), pp. 647-670.

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